News Column

Europe Offers Fear and Bargains for Investors

Aug. 13, 2012

Kathleen Gallagher

There's no shortage of fear and uncertainty in Europe.

Concerns about the ability of some countries to get a handle on their debt have caused large European stocks to underperform by more than 30 percentage points over the last three years, said Alan Purintun, a principal at Oarsman Capital Inc., Milwaukee.

Investors are still worried about the European Central Bank's ability to rally government leaders around a plan to ease the eurozone's debt crisis. Some say European Central Bank President Mario Draghi's pledge in late July "to do whatever it takes to preserve the euro" may signal a turning point and European stocks have been performing better since June.

Purintun isn't certain whether this will be the turning point or not, but he is sure of this: European stocks have low valuations and high yields.

European blue chips have valuations 20 percent to 25 percent lower than those of their American counterparts, and they're offering twice as much yield, Purintun said.

"Many of these companies have less than half their revenues in Europe, so you're not necessarily buying the European economy. You're buying into a global outlook," he said.

Investors buying individual companies should diversify across industries, such as consumer staples, financials, energy and health care, Purintun said. Here is one European blue chip Purintun holds:

Novartis AG (NVS, $58.67), Basel, Switzerland, sells pharmaceuticals and other health care products.

The company, which Purintun calls the "Johnson & Johnson of Europe," has sales of about $58 billion and operates in 140 countries. Its price-to-earnings ratio is nearly 16.6, and it has a yield of 4.2 percent.

Only about 35 percent of Novartis' sales are in Europe, so an investment doesn't represent a huge bet on just that area, Purintun said.

Novartis' strategy is focused on emerging markets, which represent about 10 percent of sales, but are producing 17 percent annual sales growth.

Purintun said the biggest risk with the stock is that its pipeline of new products won't perform as well as expected as many of Novartis' big "cash cow" drugs come off patent. Since 2007, Novartis' new products represent 25 percent of sales, and those sales increased 38 percent in 2011, he said.

Exchange traded funds, or ETFs, offer diversity in a single investment. They invest in big European companies, but investors can also fine-tune their focus with ETFs that represent specific industries, Purintun said.

Vanguard MSCI Europe ETF (VGK, $44.76) tracks the performance of the MSCI Europe Index, which includes most big companies in major European markets. It has an average price-to-earnings ratio of about 11 and yields 4.5 percent. The fund's 52-week range is $38.40 to $49.

iShares S&P Europe 350 Index (IEV, $35.27) tracks the performance of the S&P Europe 350 Index, which includes stocks of leading companies in European markets. It has an average P-E ratio of about 10 and yields 3.8 percent. This fund's 52-week range is $30.16 to $38.43.

The biggest risk Purintun associates with both of these ETFs is the possibility that Europe could continue to spiral downward and have a greater decline in the value of its currency.

Amid all the uncertainty, investors might want to take positions by buying, say, 40 percent of their desired amount, then add to it as the market moves up or down, he said.



Source: (c)2012 the Milwaukee Journal Sentinel. Distributed by MCT Information Services


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