Profit From Eurozone Panic

Before the Greek debt crisis hit, it took about $1.50 to buy 1 euro. As the extent of the crisis became known and panic set in, however, the euro plummeted. At its recent low point, one unit of that common currency could be purchased for around $1.36.

That's around a 10% swing in the currency's value, due in large part to Greece's debt-fueled implosion. As great as the advantages to Europe are when it comes to having that single, continent-wide currency, a crisis like this serves as a reminder that sharing a currency means the downside is shared as well.

Your opportunity in the crisis
Lost in the panic is the fact that Europe is a pretty large and diverse continent. While Greece is seeing the challenges from excessive debt, other parts of the continent are in far better shape. Yet the Greek crisis has contributed to the euro's decline, and as goes the euro, so go the shares of any company tied to that currency.

As an American investor, that gives you the chance to buy shares in stronger European companies at a currency-driven discount. As the euro fell, it took fewer U.S. dollars to buy the same number of euros -- and the same amount of stock in euro-denominated companies. So even if the company's shares have been rising in home currency terms, the falling euro means they may not have risen for Americans.

This chart shows just how big a difference currency moves can make:

Data from Yahoo! Finance.

Not all of Europe is Greece
Not a single company in that table is from Greece, but they're all headquartered in countries that use the euro as official currency. As a result, their shares are all being at least partially dragged down in dollar terms by what is a fairly localized problem.

And let's face it, there are three main possibilities. Either:

• The euro will fall apart under the weight of the Greek meltdown,
• Greece (and by association, the euro) will be stabilized through some sort of bailout, or
• The euro will continue to devalue for some time in response to the Greek crisis.

It is doubtful that the euro will completely fall apart, as stronger European countries with export-driven economies like Germany and France benefit significantly from the increased stability and liquidity a common currency can provide, in addition to the cost savings over paying exchange rates.

Likewise, the "austerity" plan being bantered about for the Greek bailout assumes Greece will be able to borrow at significantly sub-market rates. That's unlikely, especially at a time when significant deficits are putting upward pressures on sovereign debts throughout the region.

That leaves the third scenario -- a devalued, yet intact euro. And as it's the one that's most likely to spur exports that help the economies of the other euro-based countries, it's the one most likely to happen. As the euro tumbles, European-made goods will get cheaper on the world market by comparison. That increases Eurozone exports and, thus, the bottom lines of European companies.

Currency counts
Of course, for those of us living in the United States, a weakening euro decreases the price of European companies in dollar terms. The big question for American investors is whether the increase in export-driven profits will offset the decrease in stock values in dollar terms.

Over the short haul, it's unclear which force will win, as near-term movements in both currency and stock prices are controlled by investor sentiment as much as fundamentals. Over the long haul, however, stronger earnings and exports should eventually lead to a stronger currency, and thus a recovery in both dollar terms and local currency.

At Motley Fool Global Gains, we're taking an approach suggested by the great investor Sir John Templeton: "The time of maximum pessimism is the best time to buy." Between on-the-ground reporting in Greece and daily monitoring of the situation, we're preparing to pounce at the opportunities we see as a result of excessive negative market sentiment.

If anything's certain, it's that crisis often does eventually lead to opportunity. If you'd like to receive real-time trip reports as the team travels to Greece to get an on-the-ground perspective of what's going on and what the future will really bring, simply enter your email address in the box below to let us know where to send them.