Jubak's Journal
3 ways to invest in Europe's revival
Germany and France look like the best places to buy into a European rally in 2006. Germany could have the best prospects -- if its consumers start to spend again.
By Jim Jubak
Europe's stock markets are scorching hot so far this year. Fortunately, it's a big continent. So while you may have missed the boat in the United Kingdom and Spain, markets like France and Germany -- especially Germany -- still have lots of room to run.
And, in this column, I'm going to give you three picks you can use to add exposure to Europe's stock markets to your portfolio.
For 2006 to date, the German DAX ($DAX) index has generated a total return of 10.6%. The French CAC 40 ($PARI) has returned 7.6%. Not bad for two month's work. And especially attractive in comparison to the 3.3% return on the U.S. S&P 500 index ($INX) in 2006 to date. See the news
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Restructuring and growing
Why have these European indexes beaten their U.S. counterparts so badly in 2006 -- continuing a trend from 2005, by the way? Three reasons.
The French and German economies are showing much stronger growth, compared with their past performances. And, I should add, that's a much bigger improvement in growth than the United States is seeing. The German economy, to take the strongest example of these trends, now looks like it will grow by 2% in 2006. That doesn't sound like much in comparison to the 3.6% growth churned out by the U.S. economy in 2005, as measured by the Organization for Economic Cooperation and Development (OECD). But it represents a huge 80% improvement from the 1.1% growth recorded in 2005.
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France, projected to increase its growth rate to 2.1% in 2006 from 1.6% in 2005, shows a smaller 30% improvement. U.S. economic growth, meanwhile, is expected to shrink to 3.5% in 2006 from 3.6% in 2005.
U.S. money managers and investors concede that some companies in Europe are acting more like their U.S. counterparts. This is in direct contrast to the oft-repeated knock that European companies are hobbled by management-hobbling workplace rules and expensive social policies. This new trend is either great, because it means increased economic rationality, as it's defined in the United States. Or terrible, because it threatens to destroy a European social system that is much more egalitarian than that in the U.S. I think it's fair to say that most U.S. money managers -- and many of their global counterparts -- are proponents of the first view. Certainly, international capital has rewarded companies such as Siemens (SI, news, msgs) -- its shares are up more than 25% in the last six months -- that have undertaken U.S.-style restructurings. The restructuring efforts of a company like Siemens are enough to convince many money managers that the rules have changed in Europe -- finally. For investors interested in profiting from restructurings, Europe is much more attractive than the U.S. just because it has so much work to do to catch up.
Investing in the Old Country's economic takeoff is an attractive alternative for investors worried the U.S. economic recovery is getting long in the tooth. The economies of the Euro zone haven't outperformed the U.S. economy since 2000 (and even then the difference was small -- 3.7% growth in the U.S. compared with 3.9% growth in the Euro economies). No one really expects those economies to show higher growth than the U.S. economy anytime soon. It’s the direction of growth rates, rather than their magnitude, that spells opportunity in Europe. While the OECD predicts U.S. economic growth will slow from last year's 3.6% to 3.3% in 2007 (a rate most of the countries in Europe would love to achieve), Euro zone growth rates are projected to grow from 2.1% in 2006 from 1.4% in 2005, and than to 2.2% in 2007.
I'd steer you away from the United Kingdom and Spain for these same three reasons. The United Kingdom was the first European economy to hit its stride with 3.2% growth in 2004. Growth, however, slumped in 2005 to just 1.7%, according to the OECD, and hopes for a pickup in 2006 are based on the Bank of England cutting interest rates to stimulate the economy. Barclays Bank (BCBAY, news, msgs) recently reported a huge 44% jump in charges for bad loans in 2005. Credit card defaults were the biggest contributor to the pop. That's the kind of number that shows up when a period of easy credit, which has produced a booming economy, yields to a period of tighter credit and slower economic growth.
Spain is one of the few countries in the Euro zone actually predicted to see slower economic growth in 2006 than in 2005. The Spanish economy was pumped up last year by the country's own version of a real estate bubble, and that now seems to be unwinding. Growth in Spain in 2006, the OECD predicts, will drop to 3.2% in 2006 from 3.4% in 2005.
An extended trip to Europe
I already own two European stocks in Jubak's Picks -- one French, Alstom (AOMFF, news, msgs), and the other German, Conergy (CEYHF, news, msgs). They've both done well, and I'm going to hold onto them.
But I'm also going to add more European exposure to the portfolio. My two existing picks are in the export-driven capital-equipment sector. For this column, however, I'm going to look for companies that can take advantage of revived German consumer demand. So far, Germany's economic revival has been driven by business spending and export growth. German consumers have been very reluctant to open up their wallets and spend. But recent surveys of consumer sentiment show the strongest consumer confidence numbers in five years.
And, of course, I'll be looking for companies that have shown a commitment to restructuring. That's a trait that professional money managers are looking for, I believe, and I'd like to have their cash flow pushing up the prices of the stocks I own. I will be adding all three of these stocks to Jubak's Picks with this column.
Allianz: the proto-typical Euro company. Sept. 11, 2005, was a big day for insurance giant Allianz (AZ, news, msgs). The company, founded in Berlin in 1890, announced its conversion to a European company (a European Union format called a Societas Europaea, or SE), and Allianz launched its cross-border merger with Italian insurer Riunione Adriatica de Sicurta. (Allianz is already the No. 2 insurer in the Italian market.) But it’s the company's restructuring and cost-cutting that really attracts me. Phase 1 of the merger plan targeted about $900 million in cost savings, and Phase 2 could top that with an additional $1 billion in savings. This, plus the company's increasingly global reach in the asset-management business, add up to projected earnings growth of 15% in 2006.
Nestlé: Not resting on past success. Nestlé (NSRGY, news, msgs). You might not think that a hugely successful company like Nestlé needs an overhaul, but Nestlé didn't get to be a dominant player in the global food business by resting on its laurels. The Swiss company recently spun off its disappointing European fresh dairy operation into a 40-60 joint venture with Groupe Lactalis, the world's largest independently owned dairy business. The joint venture will free Nestlé to attack its weakness in the fresh dairy business without riling European anti-trust officials. Nestlé CEO Peter Brabeck has further targeted ice cream, bottled water, pet food and nutrition products, areas where the company needs to fill holes in its operation. The company showed organic growth (that is, before the effect of acquisitions) of 6.2% in 2005. And with a triple-A debt rating, one of the few left in the world, Nestlé won't have any trouble making even a large acquisition.
Tele Atlas: A star in personal navigation systems. Tele Atlas (TLATF, news, msgs), listed on the Frankfurt exchange, came up in my Feb. 24 column, "The next 7 big things in tech." Tele Atlas effectively divides the fast-growing digital map market -- an estimated 27% compounded annual revenue growth rate from 2005 to 2008, according to ING -- with U.S. competitor Navteq (NVT, news, msgs). Navteq is currently the market-share leader (67% to 33%), but Tele Atlas looks stronger to me in the fastest-growing end of the market -- digital maps for personal navigation devices. (Navteq, in contrast, is stronger in the in-car navigation end of the market.) Tele Atlas did especially well in Europe, with 30% growth in the third quarter of 2005. In 2004, the company acquired Geographic Data Technology to expand its market share in North America. With no debt, the company has the room to make other acquisitions so it can build market share in Eastern Europe, Asia and Latin America. Growing by acquisition is a different kind of restructuring -- as opposed to traditional cost-cutting -- but it's probably even more important for a company like Tele Atlas that's attacking such a fast-growing market. Jim Jubak's newsletter
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These three buys bring Jubak's Picks to a 100% invested position. I think the jury is still out on whether this market is trending higher or lower, but with my exposure to gold, oil and food stocks -- Nestlé and North American food wholesaler Sysco (SYY, news, msgs) -- I'm as comfortable as I'm likely to get in this kind of a choppy market.
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Updates
Buy Allianz
Allianz (AZ, news, msgs)'s four units -- property and casualty insurance, life and health insurance, banking, and asset management -- do business in more than 70 countries, but until recently the company hasn't aggressively used that global reach to build sales and profits. That is changing. For example, Allianz is rolling out across Europe products from its Pimco unit, well known for its bond funds in the United States. And the company's recent and continuing reorganization has targeted almost $2 billion in savings. As of Feb. 28, I see earnings growth of about 15% in 2006. With a continued modest increase in price-earnings-ratios across the European markets, that gives me a December 2006 target price of $19.60 per ADR.
Buy Nestlé
Nestlé (NSRGY, news, msgs) picked up momentum in the second half of 2005 that will carry over into 2006. Organic sales growth for all of 2005 came in near 6%, thanks to an almost 4% increase in unit volume and price increases of about 2%. The company's target of 5% to 6% sales growth in 2006 is certainly within reach after those results for the last half of 2005. But that's not the only good news out of Nestlé. The Swiss company has recently spun off its disappointing European fresh diary operation into a 40-60 joint venture with Groupe Lactalis, the world's largest independently owned dairy business. The joint venture will free Nestlé to attack its weakness in the fresh diary business without riling European antitrust officials. Nestlé CEO Peter Brabeck has further targeted ice cream, bottled water, pet food and nutrition products as areas for potential acquisitions. The stock is cheap for a global leader in the food and beverage business. It trades, according to JP Morgan, at just 12.5 times earnings, in comparison to an average of 16.9 for its European peers. As of Feb. 28, I'm adding the stock to Jubak's Picks with a December 2006 target price of $94 for the ADR.
Buy Tele Atlas
Tele Atlas (TLATF, news, msgs)
This German company (listed on the Frankfurt exchange) effectively divides the fast-growing digital map market -- a market projected to grow at an estimated 27% compounded annual revenue growth rate from 2005-2008, according to ING -- with U.S. competitor Navteq (NVT, news, msgs). Navteq is currently the market share leader (67% to 33%), but Tele Atlas looks stronger to me in the fastest growing end of the market -- digital maps for personal navigation devices. (Navteq, in contrast, is stronger in the in-car navigation end of the market.) Tele Atlas did especially well in Europe, with 30% growth in the third quarter of 2005. In 2004, the company acquired Geographic Data Technology to expand its market share in North America. With no debt, the company has the room to make other acquisitions to add market share in Eastern Europe, Asia and Latin America. Growing by acquisition is a different kind of restructuring than cutting costs, but it's probably even more important for a company like Tele Atlas, which is attacking such a fast-growing market. As of Feb. 28, I'm adding these shares to Jubak's Picks with a December 2006 target price of $33.50. (Please note, these shares don't trade as ADRs on the U.S. market. To buy a piece of Tele Atlas, you'll have to buy the European shares and pay an extra fee, probably around $50, to your broker.)
New developments on past columns
Why the greenback is back
The market has sent shares of Glamis Gold (GLG, news, msgs) down modestly since the company reported, on Feb. 24, the acquisition of Western Silver (WTZ, news, msgs). That's a typical market reaction to an acquisition -- send the shares of the acquiring company south -- and I think this is a very good deal for Glamis Gold. Essentially, the company is trading its financial muscle for ownership of Western Silver's Penasquito gold, silver, zinc and lead mining project in Mexico. The deal will just about double Glamas Gold's gold reserves and give a huge boost to the company's silver reserves. Glamis Gold will wind up with silver reserves of 292 million ounces, up from 42 million.
Editor's Note: A new Jubak’s Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Conergy. He does not own short positions in any stock mentioned in this column. |
