SOURCE: Creekside Partners
LAFAYETTE, CA--(Marketwire - Jun 25, 2012) - Almost every day, the front page of the business section has a story addressing Europe and the financial challenges confronting the members of the European Union.
This is actually good news for those investors, who have been sitting on the sideline, waiting for a buying opportunity.
Financial Analyst Rick Ashburn, the principal of Creekside Partners (www.creeksidepartners.com), notes that when "the news is unrelentingly bad, asset classes often get oversold."
Such is the case with large Europe-based companies that do business globally.
"Two things make this attractive," said Ashburn. "First, corporate earnings can and do adjust over time to currency movements. In other words, Euros might move higher or lower than Dollars, but earnings growth rates, when converted to either currency, will even out after adjusting for inflation if given enough time. As value investors we sometimes have to be patient for such corrections.
"Second, this group's earnings are not tied solely to the Eurozone. Europe could have a slowdown and the earnings on these biggest companies could carry on and even recover more quickly than the Eurozone itself. In fact, that very thing happened on this side of the pond with our largest companies. Over time, the stock prices of an index of large European companies should roughly track an index of large American companies, when examined in the relevant currency. We track an index of large European companies (the ETF, 'FEZ') as measured in Euros, and compare it to the familiar S&P500 as measured in dollars.
"The two indices do, in fact, track quite nicely," said Ashburn. "Until recently that is. A gap between the two of more than 40 percent has opened in the last 18 months. This is a classic value opportunity. This basket of 50 European stocks is trading at an approximate 40 percent discount to US stocks, and carries a dividend yield nearly three times that of the S&P500.
"We have been adding FEZ to most client accounts. We look to build positions of 3 percent to 10 percent, depending on client objective. As with any value-driven investment decision, this could take time. But we have learned many times over the years that if you pay the right price for an asset, time is on your side."