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Patrick founded the fee-only financial planning and private money management firm in October 2004 after spending several years at Merrill Lynch as a Financial Advisor. Pat’s primary responsibility is heading up the firm’s Private Client Group which is responsible for providing financial... More
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Greenspring Wealth Management
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  • Is Europe Cheap? 0 comments
    Mar 28, 2013 12:25 PM | about stocks: VGK, BP, NVS, NSRGY, HSBC, RHHVF

    Europe can't seem to catch a break. The last several years have seen both financial and sovereign crisis throughout Europe. The latest victim is Cyprus, which has its own banking crisis in which the fallout seems like it will be horrific. With recession gripping many countries in Europe and the continuous bad news coming from that region, you would expect their stock market to have performed equally poorly. In fact, the European stock index is about flat for the year. Unfortunately, this occurred during a period where the US stock market is up around 9%, so comparatively speaking, performance has been lackluster.

    Always intrigued by underperforming, potentially cheap, areas of the market, we took a closer look at Europe. Below is a chart put out by Guggenheim showing the dividend yield of stocks vs. bond yields in Europe. It is rare for the dividend yield to exceed the bond yield, but that is the case now, by a wide margin. In addition, absolute dividend yields on European stocks are around 4%.

    One of the concerns for most investors is how bad Europe could get and whether the economy could further infect stock prices. When you dig deeper into European stocks, you find that many are multi-national and derive a substantial portion of their income from non-European countries like the United States. The top 5 stocks held in the Vanguard European ETF (ticker VGK) are huge companies with revenues coming from all over the globe: Nestle, HSBC Bank, Novartis, Roche, and BP.

    With regards to European valuations, a recent article on CNBC talks about how inexpensive Europe is right now:

    European stocks' discount to U.S. shares is one of its biggest of the past decade, based on revenues. S&P 500 companies trade at 1.4 times their expected sales over the next 12 months against a EuroSTOXX 50 ratio of 0.7 times.

    "On price to sales, which we'd argue is one of the more useful measures for doing international comparisons, the U.S. has become noticeably more expensive than other markets versus its own history," Baring AM's Mahon said.

    Valuations in Europe look compelling compared to other markets around the world. We believe the risks in Europe are balanced by the valuation discount and investors should maintain exposure to this area of the market. The best protection from risk is valuation.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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