Why You Should Look at Europe's Big Value

Looking back at the market meltdown of 2008 and early 2009, many investors wish they had had more courage to buy at what now seem to be once-in-a-lifetime levels. Yet those same investors may have exactly that second chance -- if they're willing to look across the Atlantic to find beaten-down stocks at Armageddon-like levels.

Europe faces its own storm
Three years ago, the U.S. was the epicenter of the financial crisis that caused domestic stock markets to melt down so far. Because of the nation's status as the world's largest economy, stocks around the world followed their U.S. counterparts downward, but to a large extent, the fears foreign investors faced had to do with possible collateral damage that the American crisis could have caused -- fears that largely proved unfounded.

Now, though, Europe faces its own crisis, as the fiscal problems across the southern tier of the eurozone threaten the viability of the continent's common currency. The French stock market has already given up all of its gains since April 2009, while the German market is at its two-year low and Italian stocks are well below their early 2009 levels.

Clearly, the severity of the problems Europe is dealing with is just as bad as what the U.S. had to overcome in 2008 and 2009. But unless you have some reason to believe that Europe will be less successful in at least deferring the full impact of its problems into the future, then it's reasonable to conclude that shares are undervalued now and could rebound sharply if anything short of a complete breakup of the European Union ends up happening.

Stocks are cheap
Meanwhile, it's easy to find good European stocks offering a variety of attractive traits. Consider the following:

  • If you like high dividend yields, you'll find plenty of attractive payouts from European stocks. France Telecom (NYSE: FTE  ) , Telefonica (NYSE: TEF  ) , and Portugal Telecom (NYSE: PT  ) all pay 10% yields or more at current prices, and while they have unquestionable exposure to the European economy, they also have prospects beyond the continent. Even U.K.-based Vodafone (Nasdaq: VOD  ) , which isn't as directly exposed to the euro as its continental competitors, carries a dividend yield of more than 5%.
  • Closed-end funds specializing in European countries have also gotten very cheap. New Germany Fund (NYSE: GF  ) and Swiss Helvetia Fund (NYSE: SWZ  ) both trade near their 52-week lows, with discounts to their net asset values that make them even more attractive. Meanwhile, New Ireland Fund has actually come off its lows, but it still trades at more than a 10% discount to NAV.
  • Even broad-based European funds like Vanguard MSCI European ETF (AMEX: VGK  ) , which include stocks from countries across the continent, offer values that investors haven't seen in years.

Now it's true that there's no guarantee that Europe will pull out of its tailspin the same way that the U.S. did in early 2009. The situation is far different, primarily because Europe isn't a single nation that can work relatively seamlessly to address the problem. With multiple nations having to cooperate through a European Central Bank that doesn't have the same resources and abilities as the Federal Reserve, Europe's eventual solution will likely look quite different from what we saw in 2009.

Nevertheless, value investors know that buying opportunities never look obvious at the time. There's always a good reason not to pull the trigger and buy -- but that won't stop you from slapping yourself later after the turmoil has ended and you've missed out on a big gain.

Don't stop looking
If you've been waiting for stocks to give you the same values they did a few years ago, it's time to start turning your attention to Europe. The answer isn't simply to buy anything and everything European. But using the same disciplined investing approach you use for U.S. stocks, you can identify the best investments for your portfolio and pick them up for a song. And maybe after it's all said and done, the profits will let you take a nice trip to see the source of all your success!

If you think stocks are poised for a recovery, you won't want to miss the international ETF that will prosper from it. Take a look at the Fool's special report on ETFs set to soar in a recovery and get two great U.S. names as well.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger has never been to Europe, but he's champing at the bit now. You can follow him on Twitter here. He owns shares of Vanguard MSCI European ETF. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended buying shares of Vodafone Group and France Telecom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy travels the world for you.

Read/Post Comments (13) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 12, 2011, at 8:20 PM, ryanalexanderson wrote:

    Hmm. Might be prudent to first see what happens when Greece defaults. As it will, with its 1-year yield currently north of 100%. If the swaps and everything don't cause absolute mayhem, it might be fun to go fishing. But there'll be more time to watch and wait, I think.

  • Report this Comment On September 12, 2011, at 8:31 PM, TruffelPig wrote:

    I have got TOT and I got more today actually. Looking at SI in Germany.

  • Report this Comment On September 13, 2011, at 12:24 AM, midnightmoney wrote:

    Dan

    You seem to treat the European and American markets as distinct, but are they not moving in lockstep? Do you think that as the EU rebounds, so too will the American markets, or would you say that we have had our comeback here and should be turning abroad now? A glance at my portfolio quickly shows that we've fallen a great deal from last year's highs, and that there are ample opportunities here in the states where conditions are probably far less murky than in the EU. In any case, an investor had better have a damn strong grasp of how the two markets differ before he or she goes about investing in Europe where, as you point out, there are far more contingencies and far fewer givens in terms of coherence than here in the states. Finally, I think you would serve your readers well to point out that your article oversimplifies--severely, even--the issues Europe faces today and that there is no guarantee that, for example, Greece will not default on its debt, a number of countries won't face credit rating downgrades or even that the Eurozone as we know it may well not survive in its current form, all of which would undercut the market and cause stocks to fall precipitously from here. That said, your article strikes me as reckless.

  • Report this Comment On September 13, 2011, at 12:41 AM, lowmaple wrote:

    Telecom stocks are likely to still pay out dividends despite what happens in European nations. This doesn't seem reckless to me and you get great dividends even if they had to cut them in half. Just don't remortgage your house.

  • Report this Comment On September 13, 2011, at 1:09 AM, midnightmoney wrote:

    lowmaple,

    That telecoms pay reliable dividends is, to quote Lech Kaczinski, a very bad Polish politician, "obviously obvious."

    Reckless, however, is the suggestion that you can buy stocks for a song when there is no end to the bad news coming out of europe, few solutions for how to solve its debt problem, and the fact the market may well fall far below current levels. See BAC for a decent and timely parallel.

  • Report this Comment On September 13, 2011, at 1:20 AM, drborst wrote:

    ...And yet, I have the sense that the comments here are a sign that it might be time to Buy Europe. Things are pretty bad now. And the comments suggest they could get worse, so I'll buy a little, and if they get worse, buy more.

    Thanks Dan

  • Report this Comment On September 13, 2011, at 2:49 AM, TMFTheSnake wrote:

    midnightmoney

    Stocks prices can always drop further (until they hit zero). I don't think anyone seriously expects Dan to have called the bottom (but if he did, we're all better for it).

    When Greece defaults and if we have further credit downgrades, European shares would likely fall further, but for how long?

    Would Coca Cola Helenic no longer be able to deliver Coke to people in Nigeria because Greece defaults? Would the telephone lines in Spain cease to work if S&P downgraded Espana?

    Would the European economy be truly, fundamentally, and permanently damaged in the event that a Moody's analyst woke up on the wrong side of the bed?

    As an investor, price is important, but more important is looking through the short-term noise, finding what will fundamentally impact a company's ability to deliver its goods or services (and receive cash flow) and make a decision based on that analysis.

    Also, there is a very fundamental difference between European telecoms and BAC.

    The first group holds actual hard assets (communication networks) that will still function and be used regardless of what happens in European financial markets.

    BAC, on the other hand, hold few physical assets and most of the assets it does own could be (and may actually already be) seriously, materially, and permanently debased in the event of financial troubles.

  • Report this Comment On September 13, 2011, at 7:20 AM, TMFGalagan wrote:

    @midnightmoney -

    You make some reasonable points, although if you look at the severity of the moves in Europe compared to a much smaller drop in the U.S., I think you'd hesitate to suggest the markets move in lockstep.

    Sure, the macroeconomic situation is complicated. But investing in individual stocks isn't all tied to macroeconomics. The point I try to make is that even if the situation in European *countries* is murky, the situation for many *stocks* that happen to have headquarters in European countries isn't. Investors would be well served to find those companies and exploit the mistakes that those who are indiscriminately selling them are making.

    best,

    dan (TMF Galagan)

  • Report this Comment On September 13, 2011, at 8:49 AM, catoismymotor wrote:

    I've had my eye on LYD for close to a month. Yes, there is more risk than what I normally like to take on. But the upside potential is enormous for a LTBH investor.

  • Report this Comment On September 13, 2011, at 10:25 AM, Stoneaa wrote:

    Take a look at the best European dividend stocks with an operating margin of more than 25 percent:

    http://t.co/PaorPva

    The average price to earnings ratio (P/E ratio) amounts to 11.58 while the average dividend yield has a value of 4.55 percent. Price to book ratio is 3.21 and price to sales ratio 2.39. The average operating margin amounts to 31.38 percent.

  • Report this Comment On September 14, 2011, at 12:30 AM, midnightmoney wrote:

    TMFTHESNAKE,

    Here's my problem with your point of view: you diminish the importance of a downgrade when you say that a moody's man could "wake up on the wrong side of the bed". Obviously far more goes into a downgrade than the whims of individuals when such a move is undertaken, and the results can clearly be severe, as evidenced by the recent plunge on the heels of a single downgrade here. Indeed, this was no sleep-deprived tantrum but appropriately a manifestation of outright exasperation at the political wrangling that has rendered the US incapable of putting forth effective policy at a time when it is clearly needed.

    Your failure to ascribe the act of downgrading its proper gravity suggests a worrying degree of optimism to me, as if it were given that the us economy will rebound, unemployment will be fixed and the deficit paid down when things return to normal, whatever that may be. But it was that most mettlesome ratings agency that sent a message to politicians to finally come together and do something proactive.

    Point: we're talking about people's actual money, money they may well need today, this week, this month, this year to live on, the money they have saved for retirement or to send their kids off to Uni with. Do you think they will be happy to endure the potentially lower dividends and income their stocks will provide when the market tanks due to a downgrade?

    Finally and in answer to your question as to whether I think a downgrade would result in permanent and fundamental damage to the European economy (to the extent that an economy can be defined as European), I would say that the downgrade would come about as a result of damage rather than the other way around. While it would obviously not be permanent, the fallout could well last for years. It's whether or not such damage is being wrought here that has me concerned to begin with. As I understand the issue, the eurozone is in danger and could altogether disband if the proper steps are not taken, especially to prevent Greece from defaulting. While I doubt that will happen, investors may well be better off waiting until the crisis/crises there play(s) out before investing.

  • Report this Comment On September 14, 2011, at 3:15 AM, TMFTheSnake wrote:

    midnightmoney

    Perhaps I am being optimistic and/or dismissive, but I am purely astonished that the ratings agencies actually garner any attention from anyone after the subprime debacle. Part of this is a result of the agencies being tied in place due to legal requirements, but it doesn't make me find them any more credible.

    The fact that the US has been downgraded (by one agency) and France hasn't further damages the credibility of agencies in my view.

    So, yes, in my eyes, a downgrade doesn't mean anything and is usually reactive and something the markets have already taken into account.

    In the case of Europe I don't think the actual act of a downgrade would mean anything because the markets are already shunning peripheral European sovereign debt and the ECB is lowering the bar on what it will take as collateral, so what would change the day after a downgrade?

    To your point about people's actualy money, if it is actually money they need today, this week, this month, or even this year, it shouldn't be in any equities. It should be in highly liquid, zero (short-term) risk assets like cash.

    You are correct, however, in emphasizing investing horizon. The issues in Europe will take time to work through, so any investment in European stocks should be viewed as a multi-year investment and not a safe haven or get rich quick scheme.

  • Report this Comment On September 14, 2011, at 8:19 PM, thidmark wrote:

    "If it is actually money they need today, this week, this month, or even this year, it shouldn't be in any equities. It should be in highly liquid, zero (short-term) risk assets like cash."

    This is worth repeating.

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