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If you learned your lessons from the market meltdown three years ago, then the European sovereign debt crisis gave you the perfect opportunity to profit from that education. All you needed were nerves of steel and confidence that policymakers and government leaders would do whatever it took to allow a fragile financial system to survive.
Below, I'll talk about five European stocks that have bucked the turmoil to move sharply higher -- and that may still have room to run. But first, let's take a closer look at how Europe set smart investors up for a big opportunity coming in 2012, and how we got to where we are today.
Making the contrarian call
Ever since the sovereign debt crisis began, many financial advisors have been steering clients away from European stocks. Just as U.S. stocks plunged going into the financial crisis here, so too were advisors worried about a potentially large decline in European stocks and the psychological damage that such a drop would inflict on their customers.
Brave institutional investors, on the other hand, saw the situation as a contrarian opportunity. With so much negative sentiment, it seemed inevitable that just as in 2008 in the U.S., investors would just indiscriminately sell European stocks rather than trying to identify which stocks were actually in line to take a hit from the crisis.
Granted, European stocks have been volatile for the past couple of years. But nervous investors on the sidelines have missed out on a big rally from last fall's lows, and certain stocks have done even better than the overall stock markets in Europe.
The smart bets payoff
The Euronext 100 index is made up of blue-chip stocks that trade on the trans-European Euronext exchange, which includes French companies as well as some from other countries including the Netherlands, Belgium, and Portugal. Below, I've identified five of the stocks that both trade in the U.S. and are among the Euronext 100's top performers so far in 2012.
2012 YTD Total Return
|Aegon (NYSE: AEG )||41.6%|
|Alcatel-Lucent (NYSE: ALU )||52.8%|
|ING Groep (NYSE: ING )||28.6%|
|STMicroelectronics (NYSE: STM )||40.8%|
|Veolia Environnement (NYSE: VE )||43.3%|
Source: S&P Capital IQ.
These stocks span across several different industries, making it clear that the recovery hasn't been limited to a single sector. Overall, European stocks broadly have outperformed even the red-hot U.S. stock market so far this year by a significant margin.
The reasons behind the moves are as unique as the companies themselves. Veolia Environnement has been going through a major restructuring, trying to refocus its water and waste management business after a huge expansion that left Veolia with unmanageable debt. Despite some boardroom drama, the company looks like it's moving forward with a strategy that will lead to a leaner, more sustainable business model.
Telecom networking giant Alcatel-Lucent, meanwhile, may be going through a short squeeze, as short-sellers have targeted the stock following a strong earnings report that included the company's first profit since the merger between Alcatel and Lucent. Moreover, some see the company as a potential takeover target.
Still on the tech front, STMicro is the company behind the gyroscopes and accelerometers in various smartphones. With the new iPad coming out today, STMicro might be in position to get even faster growth from the mobile craze that has boosted its revenues in recent years.
Perhaps most surprising, though, is the presence of financial firms Aegon and ING on the list. If you think back to the crisis in the U.S. three years ago, banks and other financial services companies were among those that dropped the most leading into the decline -- but they then also rebounded the most once the crisis ended. ING has also built up a big U.S. presence thanks to its ING Direct savings and investment platform, which it recently sold to Capital One.
Never a sure thing
Of course, the thing about risk is that you're never sure you'll get the favorable outcome you want. There was a definite chance three years ago that the U.S. wouldn't figure out even a temporary solution to the financial crisis. Similarly, Europe may yet fail in its attempts to get its fiscal house in order.
What that means, though, is that beaten-down European stocks like these may still have a lot of room to run. Given the level of skepticism that many have about the Greek debt deal and ongoing problems on the Continent, you may well yet have an opportunity to profit from Europe even if you've missed out thus far.
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