Europe is a scary place right now. With bond yields in some of Europe's weaker countries soaring and the threat of sovereign default at the forefront of everyone's mind, the situation looks a lot like the U.S. did in late 2008 and early 2009. The risk of a complete collapse of the economic system -- one that could bring the continent's credit markets to a standstill -- may not be all that high, but it's definitely not zero, either.
With that in mind, smart contrarian investors should be looking at whether they can pick up some bargain stocks on the cheap from fearful investors dumping good European stocks along with bad ones. But how can you tell which companies are most likely to weather the storm?
A history lesson
If the financial crisis three years ago taught investors anything, it's that companies that rely on the credit markets too much run the risk of complete meltdown when those markets seize up. Wall Street institutions Lehman Brothers and Bear Stearns both owe their demises to a simple fact: At a critical moment, they needed outside financing, and no one was willing to give it to them. That proved once and for all that cash is king, while debt ties you down and can prove to be your undoing if it gets out of control at the wrong time. Other stocks, including Ford
So to get a sense of which stocks in Europe -- including the U.K., despite its steadfast refusal to embrace the euro -- are in the best condition to survive a similar credit crunch if it happens there, looking at debt levels is essential. Obviously, a company that has a sufficient cash cushion doesn't need to worry about whether it can borrow on the open market -- and in fact, it could be able to take advantage of bad conditions to make strategic deals like buyouts at bargain prices.
Further filtering the results to include only low- or no-debt Europe-based companies that trade conveniently on U.S. exchanges, I found the following five stocks.
Revenue Outside Europe
||$426 million / $0||95%|
|Icon||$166 million / $0||53%|
||$379 million / $0||64%|
||$65.5 million / $3.4 million||93%|
||$161 million / $0||52%*|
Source: S&P Capital IQ as of Dec. 12. *U.S. revenue; Vistaprint doesn't break down non-U.S. revenue between European and non-European countries.
Now admittedly, these companies aren't home free if the worst happens in Europe. Just as the U.S. crisis led to a global slowdown, so too would the global recession that results from a Eurogeddon scenario have a big impact on the way these companies do business. Sequans in particular has been hit hard throughout the year as a small-cap company competing against much larger chip makers in the ultra-competitive 4G market.
But these companies all have at least some cash cushion to help them get through a crisis. That's especially important for contract research organization Icon, but for all these businesses, not needing access to outside capital could be critical. Moreover, even though these companies have European headquarters, they all do the bulk of their business overseas -- something that has helped other stocks like Telefonica
Show me the money
So as you look at Europe, you have to be extremely selective in the stocks you choose. But one of the key ingredients every prospective stock you look at should have is a solid balance sheet that can withstand the worst that the sovereign debt crisis can throw at you. These companies all have their pluses and minuses, but they won't have you pulling out your hair if a credit crunch happens.
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