The French CAC40 recently reached its highest level of the year and broke through the 4000 points line, but is still lagging behind the S&P or FTSE. Even though there is still uncertainty regarding Hollande's action in terms of taxation and economic incentives, financial markets seem to be a bit more risk-friendly. The ECB keeps injecting liquidity and the European governance looks much better now, which is very appealing for the markets.
Some good financial news at short term could boost the index, which could create many opportunities.
Source: Yahoo Finance
However, investors should be very careful before investing in French stocks and focus on the strongest companies. Indeed, several sectors will probably face recession over the next years.
I made a selection of my favorite stocks, based on several factors:
- Growth potential. I believe that the companies I selected will keep innovating and play a key role in their industries in any kind of situation: crisis, war etc.
- Geographical diversification and exposure to emerging markets. I selected companies with a small exposure to Europe and recession and rising exposure to emerging markets.
- Strong fundamentals including rising revenues and margins with a good debt profile.
- Dividends and dividend growth. I chose companies that have been distributing increasing dividends for many years.
- Sustainable growth.
The objective is to invest with an absolute return objective in order to counter the current volatility.
Air Liquide (GM:AIQUF)
Air Liquide is the world's largest supplier of industrial gases by revenue. The company operates in more than 80 countries, employs 50000 people and supplies various industries such as the medical and chemical sectors. Air Liquide was founded in 1902, already highly internationalized at the beginning of the 20th century and listed in 1913. It hasn't stopped expanding yet.
To me it's the strongest French stock for Total value investors. The dividend keeps growing over the years and the stock is unlikely to become volatile despite the crisis.
Air Liquide is a buy for several reasons:
- Growth potential in industrial gases. I believe that the demand should rise over the upcoming years, for industrial gases in emerging markets and for medical gases in occidental countries.
- Exposure to emerging markets, especially Russia. I like the fact that Air Liquide is well diversified geographically with growing exposure to the U.S. and emerging markets. In 2012, 82% of the revenues were made outside of France.
- It's an interesting way to bet on the aging population. Air Liquide is investing more and more in medical gases and oxygen, which should drive the revenues over the upcoming years.
- The dividend has kept growing over the years and is part of the company's historical business profile.
- Good debt profile with a leverage of 1.61 in 2012.
- Air Liquide has also a very appealing Corporate Social responsibility, which is to me an interesting asset for long-term investors.
Source: Yahoo Finance
The share is almost trading at its highest level, but the company offers a great potential for long term investors who want to sleep well at night. Air Liquide is commonly called "Air Solide" in France.
Total SA (TOT)
Total SA is the main French integrated oil company, operating worldwide and employing more than 95000 people. The company deals with all aspects of the oil & gas chain, from exploration to production, refining, transportation and marketing. Total keeps announcing new oil discoveries, a growing production and improving results and dividends. Moreover, the French company's strategy is now to focus on exploration and invest in riskier / growing sectors such as shale gas in the U.S. or bituminous sand in Canada. Total also invests massively in the gas sector, which-- to me-- is a good point regarding gas prices and consumption.
Total is a buy for several reasons:
- Total is one of the leaders in the oil&gas sector and invests massively in exploration. The company just got several licenses in the new potential Arctic fields. Total is also investing in the solar and biomass energies, which should drive the revenues at long term.
- Growing investments: Total's objective is to invest $22b annually between 2012 and 2014 and sell $20b of assets by 2014.
- A good debt profile with leverage of 0.45 in 2012.
- A great dividend yield of more than 6% right now, which has kept growing over the years. Total developed a good payout ratio of 45% in 2011 as well as a strong link with its investors over the years.
Moreover, the share seems to be very affordable right now, Total's PE ratio should be about 7.1 in 2013 versus an average of 8.6 for its main competitors. This is mainly due to the uncertainty regarding the new French government but also to the refining sector crisis (Total being the first European refiner).
Source: Yahoo Finance
Schneider Electric (GM:SBGSF)
Schneider Electric is the main French electric engineering company. It employs 160000 people and operates across 130 countries. The company developed products in various industries such as Power, infrastructure, Industry or IT. I believe the company is the second strongest French stock after Air Liquide.
Schneider is a buy for several reasons:
- One of the global leaders in its sector with revenues almost reaching $30b in 2012. I believe that the demand from the emerging markets and the transition to cleaner energies and electricity in Europe should drive the revenues over the next years.
- Strong investments in Research and Development. Schneider invests approximately 5% of the revenues in R&D and developed many partnerships with companies like Microsoft (MSFT) or IBM. The French company also created a venture capital fund that invests in new technologies and innovating startups.
- Geographical diversification and exposure to emerging markets. Schneider Electric should be able to catch the rebound in the U.S. as well as growth in Asian markets.
The fact that management moved to Hong Kong two years ago shows that the company has been able to anticipate the slowdown in Europe and that Asia and emerging markets is now the objective. I believe that the company is very realistic about its strengths and weaknesses and acts consequently.
- Good fundamentals and dividends (growing dividend yield of 3.1%). Schneider was able to maintain its operating margin at 14.7% in 2012 with revenues reaching b24€.
- Good debt profile with a 1.25 leverage ratio in 2012.
Finally, Schneider Electric has been developing an "ethic growth" over the last years, promoting sustainable growth and diversity linked with a strong performance. To my mind, such a way of development should drive the revenues for the long term but also protect the company from potential aggressive European regulations. The French company logically outperforms the Dow Jones Sustainability Europe index and could attract new categories of shareholders.
Source: Yahoo Finance
Schneider is currently trading at 60€ (78$), which accounts for a PE of 18 and a dividend yield of 3.1%. Shares are still expensive but this is one of the best options for long-term investors.