After bouncing back to record territory in recent weeks, U.S. stocks are again showing weakness. So if you’re an investor, it’s reasonable to wonder whether the strong performance of domestic equities has in fact reached its climax.
After all, despite the pullback, there aren’t many bargain stocks to be found in America. Valuations for many U.S. stocks still are at all-time highs with the Nasdaq-100 trading for a forward price-to-earnings ratio of about 19 right now and the small-cap Russell 2000 index trading at nearly 20 times forward earnings.
If you’re concerned about buying a top, then, why not look abroad? There are a host of good investments focused on developed markets that, while not as strong as the U.S., have reasons to be optimistic in the next year or so.
That’s particularly true in Europe, where the trouble caused by elections in Greece have faded and fears of sovereign debt trouble have subsided. At the same time, the European Central Bank is easing its monetary policy in an effort to stimulate the economy and create a favorable environment for exporters.
If you’re looking to invest in Europe, here are five bargain stocks and ETFs to consider:
Bargain Buys in Europe: Siemens AG (ADR) (SIEGY)
In the age of automation, German robotics and machinery giant Siemens AG (ADR) (OTCMKTS:SIEGY) is a great bet for investors who are looking for a play on the 21st century economy that uses more computers and, unfortunately, fewer humans.
Siemens leads the world in integrated automation for use in a host of industries that include oil production, automaking and even healthcare diagnostics.
While the story is great, investors need to believe not just in the narrative, but in the numbers. Fortunately, Siemens looks good on that front, too.
While revenue has been challenged by the European slowdown, a profit dip in 2015 is projected to quickly ebb as Siemens right-sizes; after a projected $8.10 in EPS this fiscal year, according to S&P Capital IQ, the company is set to post earnings of $8.45 next year. That’s in large part thanks to deep cost-cutting efforts that include 7,800 layoffs among other efforts to save about $1.1 billion.
A good dividend of 2.5% is also attractive, and the payout ratio is less than a third of earnings so there’s no risk in a rollback here even amid Europe’s slowdown.
Throw in an attractive valuation at less than 13 times next year’s earnings and Siemens looks like quite a steal after recent volatility.
If you want to play automation and a recovery in Europe across the next few years, SIEGY stock is your ticket.
Bargain Buys in Europe: ING Groep NV (ADR) (ING)
Amsterdam-based ING Groep NV (ADR) (NYSE:ING) is admittedly a bit riskier than other plays in Europe since it’s a financial stock — and financials are volatile now as the European debt markets continue to gyrate around uncertainty on sovereign debt issues.
But when it comes to bargains among big banks, ING may be one of the best deals in the world since it is currently trading on par with its book value. Also, ING has been selling insurance divisions as part of a restructuring plan to focus on banking strategically as well as limit its exposure to other riskier segments of the finance market.
That has not only re-centered ING philosophically, but it has generated some nice cash to drive the company’s core financing operations, and recaplitalized the bank to the point that it is about to pay its first dividend since the financial crisis.
That initial dividend should grow substantially over time, too, since it’s currently less than 10% of total earnings and the future outlook of ING remains bright.
Yes, European banks had their share of trouble. But consider that ING stock is up about 15% since January to outperform both U.S. and European markets, and that longer-term it has doubled since early 2013 after finally getting its feet back under it.
There is risk here, yes, but aggressive investors looking to buy Europe’s recovery at a bargain may hit a home run with ING at these prices.
Bargain Buys in Europe: WisdomTree Europe Hedged Equity Fund (HEDJ)
Want to buy Europe in hopes of a long-term recovery, but worried about its sensitivity to the currency problems created by a weakening euro and a persistently strong dollar? Well, the WisdomTree Europe Hedged Equity Fund (NYSEARCA:HEDJ) is tailor-made for you.
The HEDJ fund is “designed to have higher returns than an equivalent non-currency hedged investment when the value of the U.S. dollar is increasing relative to the value of the euro, and lower returns when the U.S. dollar declines against the euro.” That’s because the fund focuses on export-heavy European stocks or EU companies that do a brisk business in the U.S. thanks to operations here, and thus benefit from a weak currency vs. the dollar.
It sounds niche, but the HEDJ fund has caught on with $16 billion in assets currently after adding another $280 million in inflows last week. Top holdings are a who’s who of European companies that are popular in America — beer giant Anheuser-Busch InBev NV (ADR) (NYSE:BUD), Mercedes manufacturer Daimler AG (OTCMKTS:DDAIF) and consumer products giant Unilever plc (ADR) (NYSE:UL) which owns brands including Lipton teas and Suave beauty products.
As a result of strong performance of these stocks and continued weakness in the euro vs. the dollar that’s creating a tailwind, HEDJ has racked up nearly 20% in returns since Jan. 1.
There are many reasons investors can expect this to continue, too, as the currency exchange rates look to only get worse thanks to the Fed tightening policy and the European Central Bank continuing to ease.
Expenses run at 0.58%, or $58 annually for every $10,000 invested.
Bargain Buys in Europe: iShares MSCI France Index (ETF)
If you want to dive into one specific region of Europe instead of playing the region broadly, France may be your best bet. Because while Germany is indeed the biggest and baddest of the eurozone economies, France offers a great amount of value — and income.
The iShares MSCI France Index (ETF) (NYSEARCA:EWQ) is the best way to play this trend. Consider that top holdings of this fund include drugmaker Sanofi SA (ADR) (NYSE:SNY), with a 3.2% dividend yield and a forward P/E of 15, and energy giant Total SA (ADR) (NYSE:TOT), with a 5.5% dividend yield and a forward P/E of 12.
These are huge blue chips with scale and stability, trading for attractive prices with strong dividends to reduce your risk.
What’s not to like?
The challenge facing France, of course, is the threat of a European slowdown that could weigh on business metrics of all companies — including the ones in this France ETF. However, the weak euro will help multinationals based in France including Total and Sanofi going forward to offset some of the headwinds.
Germany is the low-hanging fruit if you’re looking to play an individual country, but that seems to be a crowded trade lately with bottom-fishers piling into this fashionable region. France is still unloved and companies there are trading for attractive earnings multiples right now, so considering buying the EWQ ETF to cash in on this trend.
Expenses are 0.49%.
Bargain Buys in Europe: Vanguard Total International Stock ETF (VXUS)
Maybe you want a small footprint in Europe but you’re still not convinced that it’s wise to get directly involved in the continent just yet. There’s nothing wrong with that cautious approach — and there are ways to invest like this if you want.
Enter the Vanguard Total International Stock ETF (NASDAQ:VXUS), an ETF that focuses on global investments outside of America with a bias toward Europe but also exposure to other global markets.
An international fund is a crucial part of any portfolio, as in this globalized economy an investor can’t afford to only be focused on U.S. companies. Consider that VXUS is up 5% since Jan. 1 to more than triple the return of the S&P 500 index in the same period, even amid all the kerfuffle about a “grexit” a few weeks back.
As the U.S. dollar remains strong and U.S. stocks continue to bump against valuation ceilings, it would behoove all investors to consider a little overseas exposure — not just in Europe. VXUS allows you to do this cleanly by keeping its portfolio ex-U.S. and avoiding duplication of large-cap stocks from other funds you may own.
Of course, Europe makes up the lion’s share of this portfolio with nearly half of all assets allocated in this region – including many of the largest positions including consumer giant Nestle SA (OTCMKTS:NSRGY), healthcare giant Novartis AG (ADR) (NYSE:NVS) and oil king Royal Dutch Shell plc (ADR) (NYSE:RDS.A, NYSE:RDS.B) as the top three.
Outside of this, however, you spread your cash around a bit in Japan, Canada and even a select group of emerging markets for diversification.
And like all Vanguard funds, the costs are dirt-cheap with an expense ratio of just 0.14%.
VXUS is a good one-stop shop for investors who want to stay diversified globally to include Europe in their portfolio, but aren’t willing to make direct or outsized bets on the continent.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.