Europe has been in the spotlight over the last two years because of its debt woes. Everyone seems to hate Europe and that has been shown in the stock market, with huge falls over the last months. Consequently, investors are seriously underweight Europe and the dumping of these stocks has resulted in cheap valuations.
Although I'm aware that the outlook for Europe is very uncertain this is, to a large extent, already priced in. For contrarian investors that have a long-term view, this point of maximum pessimism can represent a good buying opportunity. For a quick search of European bargains, I ran a simple equity screening tool with the following criteria:
- Cheap Valuations: P/E ratio below 7x and P/BV ratio below 1x;
- Avoid Small Caps: market capitalization above €1bn ($1.30bn);
- Not too much indebted: net debt to equity ratio below 50%;
- Cash flow generator: positive free cash flow in the last year.
This simple screening criterion produced the three following results:
|Company||P/E Ratio||P/BV||Net Debt/Equity (%)||Market Cap (B USD)|
Kinnevik Invest (GM:KINNF): Is a Swedish holding company. Kinnevik's invests in and manages a long-term portfolio of listed and unlisted companies. Its holdings are focused around seven comprehensive business sectors: paper & packaging, telecom & services, media, online, microfinancing and renewable energy. It has a long history of investing in emerging markets, which has resulted in a considerable exposure to consumer sectors in these markets. Kinnevik plays an active role on the Boards of its holdings.
According to the company, 46% of its investments are in Western Europe, 21% in Eastern Europe, 23% in Latin America, 7% in Africa, 2% in Asia, and 1% in North America. Kinnevik's stakes includes Tele2 (OTCPK:TLTZY) and Groupon (GRPN), beyond others. Kinnevik's dividend policy is to pay out more than 85% of ordinary dividends received from the listed holdings during the same year. The current dividend yield is of 3.72%.
Aurubis (GM:AIAGF): Based in Germany, Aurubis is the leading integrated copper group and the world's largest copper recycler. Aurubis' position is defended by strong entry barriers due to high capital requirements and environmental restrictions.
The company core business is the production of marketable copper cathodes from copper concentrates, copper scrap and recycling raw materials. Customers of the Aurubis Group include companies in the copper semis industry, the electrical engineering, electronics and chemical industries as well as suppliers of the renewable energies, construction and automotive sectors.
Historically, Aurubis shares have been trading along copper prices, although less volatile. The company has a dividend yield above 3%.
Holmen (GM:HLMNF): Holmen is based in Sweden. Is a forest industry group that manufactures printing paper, paperboard and sawn timber and runs forestry and energy production operations. The Group has five production plants in Sweden and one each in the UK and Spain. The forests and hydro power facilities are located in Sweden. Around 90 percent of sales take place in Europe via Holmen's own sales companies.
Additionally, another company also appeared on results but it isn't from Europe. Kazakhmys Limited (OTCPK:KZMYY) is from Kazakhstan but listed on the London Stock Exchange. Kazakhmys is an international natural resources company with principal operations in Kazakhstan an the surrounding region. The core business is the production and sale of copper. The company is fully integrated from mining ore through the production of finished metal. The shares trade with a P/E of 5.3x, P/BV of 0.87x and has a net debt to equity ratio of 20%.
These stocks appear to be bargains, based on cheap valuations typical of bear-market lows and solid business models (low debt and positive cash flow). Although buying European stocks isn't without risks, for contrarian investors and with a value investor mindset, these three stocks could represent a good starting point for further research.