Rotblut: Investing In Europe? Do Your Homework
The sovereign debt crisis in Europemay be presenting opportunities for long-term investors who are willing to take a contrarian stance. Seeking opportunities on the other side of the Atlantic requires more than a willingness to accept short-term risk, however; it also requires an awareness of one's limitations.
Knowledge and information restrict one's ability to properly analyze every investment. Knowledge is your practical understanding of a subject. Information is the facts you have or can access. You can have the knowledge, but not the information, to make a good investment decision. Conversely, you can have access to information, but not the knowledge to apply it.
Many times, investors lack enough knowledge and information to conduct a proper analysis. The current sovereign debt crisis in Europe is a good example. We know that European leaders are trying to prevent the crisis from worsening. We also know there is resistance within individual countries (e.g., Greece and Germany) to some of the potential solutions. What most of us do not know is how the crises will evolve or when a resolution will be reached—nor do we have enough information to predict the outcome with much accuracy.
I am not afraid to admit that I am among those who lack enough knowledge and information to accurately predict what will happen in Europe. I am cognizant of the risks, but any opinions I have are solely based on what the news reports tell me.
What I do know, however, is that crises create opportunities for long-term investors. This is could particularly be the case for non-financial companies headquartered in Europe. They are not likely to be directly affected by the sovereign debt crisis, though fear about a widespread collapse in the European banking sector could be depressing their prices.
With this in mind, I decided to create a screen in our Stock Investor Pro program to see what would be identified. I sought out non-financial European companies whose American Depositary Receipts, ADRs, were listed on U.S. exchanges. Earnings growth, including positive year-over-year growth for more recently reported quarters, and dividends were required to weed out the weakest companies. Valuations were capped at a price-earnings (P/E) ratio of 20. Finally, I required that the current P/E be below the average P/E of the past five years to increase the odds that the passing companies were trading at bargain prices.
Keep in mind that this is a fairly simplistic and restrictive screen. As such, it is merely meant to be a starting point for further research, with the understanding that other suitable European ADRs may be available.
|Company||Ticker||Price ($)||P/E (x)||5-Yr Avg. P/E||3-Yr EPS Growth (%)||Yield (%)||Industry||Country|
|Delhaize Group (ADR)||DEG||56.77||7.5||11.8||13.2||4.4||Retail (Grocery)||Belgium|
|Siemens AG (ADR)||SI||88.19||11.0||25.3||3.5||4.2||Electronic Instruments & Controls||Germany|
|Aixtron AG (ADR)||AIXG||15.43||5.7||30.2||114.6||5.4||Semiconductors||Germany|
|Rio Tinto plc (ADR)||RIO||46.44||5.7||13.4||8.7||2.5||Metal Mining||United Kingdom|
|Unilever plc (ADR)||UL||30.75||14.9||15.0||3.0||4.0||Food Processing||United Kingdom|
|AstraZeneca plc (ADR)||AZN||42.91||7.5||10.8||14.4||6.3||Biotechnology & Drugs||United Kingdom|
|Smith & Nephew plc (ADR)||SNN||44.57||12.7||21.9||26.5||1.8||Medical Equipment & Supplies||United Kingdom|
|BHP Billiton plc (ADR)||BBL||54.28||6.3||12.4||15.9||3.7||Metal Mining||United Kingdom|
Foreign Dividend Reinvestment Plans
Many European companies offer dividend reinvestment plans. These programs allow shareholders to use their dividend payments to acquire additional shares of stock. The advantage of such programs is that they allow you to use a form of dollar-cost averaging to increase the size of your holdings. (The disadvantage, of course, is that you do not directly receive the dividend cash.)
Three services that facilitate foreign dividend reinvestment programs were listed in the June 2008 AAII Journal and are still accessible to individual investors.
Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.