No Crisis for These 6 European Stocks

11/24/2011 8:30 am EST


George Putnam

Editor, The Turnaround Letter

These are all global powerhouses with strong business franchises that span the world. As such, they will be as resistant to a slowdown in Europe, or more so, than multinational companies based in the US or Asia, writes George Putnam of The Turnaround Letter.

Despite their global strength, their stocks have been weak in recent months as Europe’s woes make headlines almost daily.
In addition to powerful brands and international reach, a number of them have very attractive dividend yields.

Sure, Europe has a lot of problems, and they are not likely to be fixed anytime soon. But the problems are well known.

Baron Rothschild is reputed to have said, “The time to buy is when there is blood in the streets.” If he was right, this might be a good time to look at European stocks.

Koninklijke Philips Electronics (PHG)
The GE of Europe (but without GE’s big financial-services business). And like GE, Philips’ stock rallied strongly into the end of the last decade, but has stagnated ever since.

Management, however, hasn’t sat still—the company has effected significant corporate changes that have streamlined operations. While Europe is its largest market, fully two-thirds of revenues are derived from outside its home turf.

The latest quarter, though soft, showed some stability in operating momentum, and the stock’s valuation and dividend yield are quite attractive.

LM Ericsson Telephone (ERIC)
A global maker of telecommunications equipment. Results in recent years have been hurt by Ericsson’s joint venture with Sony in the ultra-competitive cell-phone handset market, but the company is in the process of getting out of that business.

Other lines of business are doing well, with particularly good growth in South America and Asia. The company should also see opportunities in its service operations, a fragmented market in which Ericsson is considered to be a market leader.

Novartis (NVS)
Born in 1996 as a result of the merger of two Swiss drug makers, Ciba-Geigy and Sandoz, acquisitions have continued to be a key element in the firm’s growth and diversification efforts.

Though prescription drugs account for some 60% of sales, Novartis has a strong generic division as well as a presence in vaccines, diagnostics, and consumer health.

A strong pipeline of new products, attractive growth metrics in emerging markets, and solid operating cash flows bode well for patient investors.

Smith & Nephew (SNN)
This company has been involved in medical technologies since 1856. Over the last decade or so, the company has focused on advanced wound management, endoscopy, and orthopedics.

Recent operating results have been decent, but headwinds in the form of European austerity and shifting US healthcare regulations have kept investors on edge.

A new CEO is expected to use acquisitions and an emphasis on emerging markets to spur long-term gains. The company’s size, worldwide scope, and solid financials bode well for continued success.

STMicroelectronics (STM)
A leader in semiconductors that help with power consumption and battery life, it is also a supplier of gyroscope chips for Apple’s (AAPL) iPhone.

Management has shuffled the company’s assets in recent years, including exiting the memory-chip business and entering a wireless-chip joint venture with a division of Ericsson.

Although the near-term outlook is cloudy, the stock is attractively valued, and the dividend pays you well in case you have to wait for a tech rebound.

Telefonica (TEF)
This has long been thought of as a Spanish company, but it actually has one of the more international profiles in the telecom sector. Roughly two-thirds of revenues come from outside its homeland.

Latin America is a substantial market, as are other European countries such as the UK, Ireland, Germany, Czech Republic, and Slovakia. The company recently entered the Chinese market via an equity stake in China Unicom (CHU).

Sales in 2010 rebounded strongly, and operations returned to profitability. The generous dividend of 8.2% appears secure.

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