10 Stocks to Buy on Euro Fears

03/05/2013 3:11 pm EST

Focus: STRATEGIES

Jim Jubak

Founder and Editor, JubakPicks.com

Another European debt crisis is on the horizon, and by summer a lot of good companies based there will be on sale. Here are ten to consider picking up, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

On July 26, 2012, European Central Bank President Mario Draghi made his now-famous promise to do "whatever it takes" to save the euro.

That put an end to soaring yields on Spanish and Italian government debt that threatened the very existence of the euro. And it set off a huge, sustained rally in European stocks and bonds that has only recently faltered. I bring this up for two reasons:

  • First, I think that Draghi's promise is going to be challenged, and challenged hard—with its very real flaws and limits exposed to scrutiny by the financial markets—over the next few months.
  • Second, this renewal of the Eurozone debt crisis has the potential to take the shares of some very good European companies—companies you'd like to own for the long term—down to bargain levels again.

This column has two purposes: first, to run through the reasons I think we're about to see a new round in the Euro debt crisis; and second, to give you a list of ten European stocks that I'd snap up if their prices fall in a new round of the crisis.

The Eurozone Mess Revisited
Let me take you back to the scary days of July 2012.

Yields on Spanish ten-year government bonds climbed to 7% and then kept on climbing. Analysts and economists joined in daily hand-wringing, saying that at above 7%, the burden of debt on a struggling Spanish economy was unsustainable. Spain seemed headed to bankruptcy, a bailout, a departure from the Eurozone—or a combination of those.

Italy wasn't far behind. The yield on Italian ten-year government debt hadn't reached 7%, but at 6.597% it was clearly headed in that direction.

That raised the hand-wringing to another level: The Eurozone probably didn't have the resources to bail out Spain or Italy. It certainly couldn't handle a bailout of both.

Draghi's speech stopped that discussion dead in its tracks. The "whatever it takes" promise had credibility, because it followed on the central bank's huge long-term refinancing operation that provided €1 trillion (roughly $1.3 trillion) in cheap money to European banks.

That move had shown that Draghi would act, and act big. When the July promise was fleshed out with a new Outright Monetary Transactions pledge that said the European Central Bank was prepared to buy unlimited amounts of government bonds of maturities of three years or less of any country in bond-market distress, the promised support was enough to turn financial markets around.

The yield on ten-year Italian government bonds—which peaked at 6.597% before Draghi's speech—had fallen to 4.129% by January 25. The yield on ten-year Spanish government bonds, which had peaked at 7.498%, fell to 4.904% on January 10.

European stock markets recovered, too. The American depositary receipts of Spain's biggest bank, Banco Santander (SAN), climbed from $4.89 on July 24 to $8.81 on January 25. In Germany, shares of car giant Volkswagen rose from €118.75 on June 27 to €186.75 on February 2. (Prices for the US-traded ADR for Volkswagen, VLKAY, rose from $28.27 to a peak near $48 on the same dates.)

Even a French consumer stock such as dairy maker Danone (DANOY) got into the act, rising from $11.33 on July 25 to $14.28 on February 19.

Back in Trouble
Recently, though, some of the gloss has come off those gains.

As of March 1, the yield on the Italian ten-year bond had climbed to 4.79% from 4.129% on January 25. The yield on the ten-year Spanish bond had increased from 4.904% on January 10 to 5.10%. Banco Santander ADRs are down 14.9% from their January high as of March 1. And shares of Danone are 3.7% lower than their February high.

What happened?

First, the Italian election resulted in a hung parliament, with Democratic Party leader Pier Luigi Bersani's coalition winning a majority in the lower house, but with no party or coalition winning a majority in the upper house.

As the days have ticked by since the February 24-25 election, the chance that anybody will be able to put together a government has dwindled. That leaves Italy adrift for at least a month—longer if the country needs new elections.

Second, projections from the World Bank and the International Monetary Fund have said that economies throughout the Eurozone will continue to slow.

Also, those agencies announced that the growth projections used by Spain, Portugal, and France to put together their deficit-reduction plans are now not only optimistic, but also unrealistic. Countries that missed their budget deficit targets in 2012 now look likely to miss them again this year.

Third, The political reaction to the Italian election has served as a vivid reminder that European leaders are locked into a strategy of austerity, austerity and more austerity.

That's especially problematic now because Italian voters rejected more austerity (and a good bit of past austerity, too) in the recent election, and because as economic projections go from bleak to bleaker, austerity seems more and more like a failed policy.

If, because of their own internal politics—including a September 22 election in Germany—leaders of Germany and the Netherlands remain locked into a position favoring austerity, then financial markets are about to see a replay of the Greek crisis. But this time, there are more chips on the table.

Fourth, a budget crisis and the need for a bailout in Cyprus have again raised the specter of a country being forced to leave the euro.

And finally, the Italian crisis has led some in the financial markets to read the fine print in Draghi's promise of unlimited bond buying. The European Central Bank promise had a big condition: A country had to make a formal request for a ECB bond-buying program to the European Stability Mechanism and agree to the conditions—budget cuts, tax increases, and economic reforms—set by the eurozone's bailout fund.

Italy currently can't meet those conditions because it doesn't have a government that can agree to anything. Spain has refused to make a formal application to the European Stability Mechanism because it doesn't want to give up control over its finances as Greece has had to do.

With bond yields falling on Draghi's promise, Spain has felt comfortable doing nothing. In recent weeks, markets have again begun to wonder how long that's a viable position for the government of Prime Minister Mariano Rajoy.

NEXT: 10 Stock Recommendations

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The Next Steps
Where now? Well, investors will get some clues from Draghi's news conference after Thursday's meeting of the European Central Bank's governing council. I doubt the central bank will do anything, which makes what Draghi says and how markets react to his words especially important.

We're witnessing a major test of the ability of rhetoric to control the Eurozone debt crisis. And then it's up to the financial markets to react to events—the talks on a Cyprus bailout and the likelihood of continued chaos in Italy—to decide how quickly we move back to a real crisis condition.

Italian ten-year yields have climbed 0.67 percentage points from January 25 to March 1. But considering that we're looking at a country with no real chance of putting together a government for at least two months, that move in bonds has so far been very muted.

The fall in the euro against the US dollar—4.6% from February 1 to March 1—has been more pronounced, which leads me to think that bond yields will continue to move higher (which means bond prices will move lower).

But I don't expect those moves to be smooth. Investors have competing financial crises in Tokyo and Washington to watch. The pound sterling is sinking as markets become increasingly convinced that London wants a weaker pound to help its economy. And I expect that Draghi's rhetoric hasn't yet lost all its power.

By July, I think we could see the Euro debt crisis again in full flower—driven by bad first-quarter economic reports and another round of midyear downgrades to economic projections from the International Monetary Fund, the World Bank, and the Organization for Economic Co-operation and Development.

If that timetable is right, I'd expect to see bargains on the stocks of great European companies in July and perhaps sooner as this crisis leads the market down in fits and starts.

10 to Buy as Prices Fall
What stocks? Here, in alphabetical order, are the ten I'd most like to pick up at bargain prices.

  1. Banco Santander (SAN), because the Spanish bank remains a dominant global bank, and someday Spain's banking troubles won't weigh down the franchise. (Banco Santander is a member of my Dividend Income portfolio.)
  1. Bank Zachodni, which trades as BZW.PW in Warsaw, because Poland has been the fastest-growing economy in Europe, and the longer euro troubles keep Poland on the zloty, the more Poland will thrive as a low-cost manufacturing base for Germany.
  1. Danone (DANOY), because of the potential of this French dairy producer in emerging markets (and because I think it will sooner or later be an acquisition target).
  1. Dassault Systems (DASTY), because this design software maker is one of the leaders in software for printers used in 3D manufacturing.
  1. Kone, trading as KNEBV.FH, because this Finnish maker of elevators and escalators is linked to the global construction market via big exports to Asia.
  1. L'Oreal (LRLCY), because the cosmetics-maker is expanding in emerging markets, and because when Nestlé's (NSRGY) standstill agreement expires in 2014, L'Oreal will either be the target of a takeover or wind up wooing investors as it tries to buy back Nestlé's shares.
  1. LVMH Moët Hennessy Louis Vuitton (LVMUY), because this is one of the premier luxury-goods companies in the world.
  1. Novo Nordisk (NVO), because US FDA delays with Tresiba, the company's newest insulin, and the Eurozone debt crisis might be the only chance to get the stock at a discount.
  1. Schneider Electric (SBGSY), because this French maker of electrical equipment is a great way to play the global build-out in utility grids.
  1. Svenska Handelsbanken (SVNLY), because this very conservative Swedish Bank will take a hit from troubles with the euro for no good reason.

I'd look on the next few months as a chance to decide if any of these fits into your portfolio, then sometime around midyear you'll be ready to take positions (or add to existing positions) in these stocks.

Look to the lows from 2012 just before Draghi's "whatever it takes" speech to give you an idea of what might constitute a bargain for these shares.

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 Bank Zachodni, LVMH Moët Hennessy Louis Vuitton, Novo Nordisk, and Svenska Handelsbanken as of the end of December. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.

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