By David Sterman
The end is near. That is to say, the deepening European crisis is coming to head. And when policy makers finally devise an effective strategy to tackle the banking mess in Southern Europe, the never-ending market sell-off in Europe will likely come to an end.
This is also good news for investors in the United States for two reasons. For one, it should help stabilize global markets, including the United States, giving an air of certainty to what has been a tumultuous and uncertain market of late. And second, it should present opportunity to savvy investors.
A final debt package is likely to create headaches for leading banks, many of which will need to acknowledge the reality of underperforming loans to weak countries. Deeper austerity programs in places like Greece and Italy will also likely be a byproduct. Yet when the dust finally settles, investors will likely realize that German stocks -- heavily weighted to a solid economy as well as key emerging markets -- represent deep, deep bargains.
It may be a bit too early to start buying these Germany-focused stocks and funds, but the time is at hand to prepare a wish-list, so you can move quickly when the time comes. After all, the DAX, Germany's main stock index, has fallen from 7,500 to 5,000 in just two months. This is a sharply lower entry point for those that have neglected to gain exposure to this powerful economy in the past.
Perhaps the only group to be avoided is Germany's banking sector, which may feel the reverberations of any continent-wide settlement for a while to come. German banks will likely be asked to take big write-downs for loans to Greece and other struggling countries. Though they are unlikely to run short of capital, these banks may need to constrain any further new lending activity until their balance sheets are shored up.
Instead, investors should be focusing on what the Germans do so well: exports. You can buy American Depositary Receipts (ADRs) of a range of blue chip exporters.
Here's what I'm focusing on:
1. BMW (BAMXY.PK)
Global car sales have been constrained in the United States and Europe for several years, but the beleaguered auto industry can point to two bright spots: emerging markets and higher-income buyers.
A deep economic slowdown would surely be felt at BMW. The automaker saw sales fall 5% in 2008 and again in 2009 before rebounding 20% in 2010 to €60 billion. Even in those slump years, the automaker remained profitable. And in 2010, profits rebounded strongly back up above €3 billion.
Still, fresh economic concerns have pushed BMW's ADRs down from $35 to $23 since the middle of the summer. The timing is auspicious. In addition to its still-popular slate of cars and SUVs, BMW is about to make a big push into advanced electric vehicles, with products aimed at the low and high end of this burgeoning market. This is the payoff from recent heavy capital spending (more than €10 billion during the past three years) that should enable BMW to take market share in coming years.
2. Infineon (IFNNY.PK)
This chip maker may be seen as just another play in the boom-and-bust computing industry, but its end-market approach is much more diverse, focusing on chips used in cars, industrial equipment and passport/ID cards. A key theme behind the company's approach has been to focus on areas using an expanded level of technology. For example, today's cars use a lot more chips than ever, a trend expected to continue for the foreseeable future.
For the full fiscal year slated to end this month, sales are expected to rise roughly 20% to around €4 billion. Assume sales will be flat or slightly down in the coming year as global economic pressures remain in place. But Infineon looks well positioned for shareholders with a long-term view that a wide range of industrial and consumer equipment will keep incorporating a wider range of electronics into their systems. The fact shares have lost more than 30% since early July opens the door for long-term investors.
3. New Germany Fund (GF)
This closed-end fund focuses on small, mid-sized and large German stocks, primarily focused on industrials (40%), materials (20%) and technology (15%). Many of these holdings have a very strong export orientation, both to Europe but also to Latin America and Asia.
For many of these firms, business may slow in coming months as the European banking crisis erodes confidence in spending. The fund's sharp drop from $18 to $13 in just two months already anticipates the slowdown yet to come. Stated Net Asset Value is $15.64, more than $2 higher than the current share price.
Risks to consider: Though the recent sharp selloff in German equities already reflects expectations that Europe and/or the United States will slip into recession, a much deeper recession than is currently anticipated would push these securities down even lower.
It's important to stay focused on good companies with strong track records. These investments play right to Germany's strength in advanced technology and export-focused business models. BMW is a great example. We don't know how the global auto industry will fare in the near term, but we know a company like this can do quite well in the long term. If the stock simply moved back to levels seen in early July, then investors would be looking at a 60% gain.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.