What to Do About Europe?

It seems like there's always a whole lot of stock activity and crises going on in Europe these days, leading to lots of investment questions. However, MoneyShow's Jim Jubak, also of Jubak's Picks, has some answers you need.

It's not quite as pressing a question as what to do about what could be the start of a breakdown in the US market in last Thursday's, August 15, trading. Or what to do about a Japanese stock market that seems afraid to commit to a weaker yen. Or what to do about China where growth is either surprisingly strong or disappointingly weak.

But after data last Wednesday, August 14, indicating that the EuroZone had moved out of recession in the second quarter, what to do about Europe is an important question for investors?

Should you jump in-or add to weightings in your portfolio-on modest but hopeful GDP numbers? Growth for the second quarter was positive-but not by all that much at 0.3%. Take away the 0.7% growth in Germany, and the 0.5% growth in France, and the EuroZone would still be stuck in recession.

And if the answer is buy, what stocks or kinds of stocks should you be targeting?

Let me give you some general framework for thinking about European markets (in the EuroZone and in the larger European Union) and stocks, and then a couple of specific suggestions for stocks that I think fit the current situation.

My framework for thinking about European markets breaks down into three general statements.

First, remember that at 0.3% growth, and the strong possibility of even weaker growth for the rest of 2013, we're talking about a recovery that is even slower and weaker than that we've seen in the United States. Investors aren't looking at strong growth, so much as, an end to declining growth. This isn't the kind of strong growth that lifts all ships.

Second, the EuroZone was an export-oriented economy (thanks to Germany's weighting as the largest economy in the EuroZone) before the euro debt crisis, and it has become even more export-oriented since the crisis, as countries such as Spain and Portugal have decided that they have to export their way out of their recessions. This is important since a recovery in European economic growth is relatively less important to an exporter that is suffering falling or stagnant sales because growth is slowing in China. Many of Europe's companies have looked to emerging markets for growth in recent years-and now that strategy-sound in the long run-is taking a bite out of revenue growth in the short term.

Third, many European stocks have already moved up in anticipation of an end to the recession. And in these cases you aren't buying gems overlooked by everyone else. Stocks that have gained 40% to 50% in the last year aren't uncommon in the markets of the region. And in beaten down sectors, such as banking and alternative energy, you'll come across stocks that are up 100% or more in the last 12 months. French bank Credit Agricole (ACA:FP) in Paris and (CRARY) in New York, and Danish wind turbine manufacturer Vestas (VWS:DC) in Copenhagen are two examples, up l06% and 289%, respectively. I'm not saying that you shouldn't buy a stock just because it's up 100%. I am saying that with a stock showing that kind of return, you should make sure that you think there's more upside ahead for you.

So what would I suggest here?

I'd concentrate on domestically focused European companies in the strongest European economies. I'd leave such great exporters, such as Finland's Kone (KNEBV:FN) in Helsinki, and for a day when growth in China is more predictable. If you sell escalators and elevators, which is what Kone does, a big part of your growth depends on the trend in emerging market-and especially Chinese-residential and commercial construction.

My preference in European markets at the moment is for companies such as Kingfisher (KGF) in London, a big do-it-yourself retailer (think Home Depot HD) with a big market share in the improving economies of the United Kingdom, France, and Poland. I'd look at Danone (BN:FP) in Paris and (DANOY) in New York, where sluggish demand in Europe has been a serious drag on growing emerging market sales. I think even modest improvement in its core European markets would mean a big boost to the company's bottom line. Volume in Europe fell by 1.6% in the second quarter. (The world's biggest cosmetics company, L'Oreal (OR:FP) in Paris and (LRLCY) in New York faces a similar European growth problem, that has been a drag on the company's increasing penetration of emerging markets.) Whitbread (WTB:LN) in London, used to get its growth, such as it was, from its brewery business. Now it comes from its Costa coffee shops and the Premier Inn budget hotel chain. Continental (CON:GR) in Frankfort and (CTTAY) in New York sells to just about every European automaker, and is a good way to play the turnaround in European auto demand. The US's BorgWarner (BWA) is another way to play that recovery in demand.

I'd be cautious here because any turmoil in the US market in September will spill over in global markets and because the European recovery is very tentative at this point. And we could well get another quarter or two of economic contraction in the last half of 2013.

Time to research and nibble rather than gobble.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Danone and L'Oreal as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.