Is It Time To Take A Chance On Europe?

Includes: HSBC, MT, TI, TOT, VEOEY
by: Kevin Quon

After almost deceitfully denying for months that the country would need a bailout, Spain laid its cards out on the table this past weekend in confessing that it would require assistance to shore up its banking institutions. As the fourth largest economy behind Germany, France and Italy, Spain looked to be the most challenging crisis put forth before the European Union to date. Therefore, as Spain set the scene as a threatening bellwether to determine how committed the European Union was to itself, it was clear that any action would have to be both decisive and potent.

In this market of fear and uncertainty, the action therefore taken this past weekend likely served as an important step in mitigating the nerves of investors who continue to question if the European nations are willing to save the integrity of the European Union. In a strong commitment made the day after Spain's announcement, eurozone finance ministers developed an aid package that was designed to lend Spain up to 100 billion euros (~$125 billion). Such a sizable package appeared to be larger than expected by the markets. As of Sunday night, June 10, stock index futures were up over 1% on the news.

With the surprise factor to the upside regarding the package size, and the extended declines to the market over the past few weeks, investors may want to consider opening up a few bullish positions on European equities that have continued to ail over European woes. While the situation remains far from resolved, the commitment made this past weekend stands likely to express a tone being set by those leaders involved. As least in the short term, a rally appears imminent. When considering this alongside the fact that from a fundamental standpoint several large European equities also remain largely discounted, investors looking to capitalize upon the situation may have found their opportunity. The following five companies are some well-branded possibilities to consider.

Company Name Market Cap. Fwd. Div% Price/Book Ratio Industry
Veolia Environnement (VE) $6.3 B 6.3% 0.69 Waste Management
Total (NYSE:TOT) $98.2 B 6% 1.11 Oil & Gas
ArcelorMittal (NYSE:MT) $22.1 B 4.5% 0.39 Steel
Telecom Italia (NYSE:TI) $17.7 B 4.7% 0.60 Telecommunications
HSBC Holdings (HBC) $164.1 B 4.4% 1.01 Banking

One company that is likely to be highly sensitive to the ongoing situation in Europe is ArcelorMittal (MT). The large steel and basic material company tends to be responsive to factors that could affect industrial output in the region. Recent deterioration in the confidence surrounding Europe has suppressed the company that continues to trade at a price-to-book ratio of 0.39. Yet the company has been preparing itself for a possible slowdown. The company has successfully been shedding its non-core assets to shore up its balance sheet as it demonstrated with the recent sale of Skyline Steel for $605 million. Likewise, it recently announced its extended idling of its Florange steel plant to the end of 2012 as a defensive measure. With forward-looking analyst expectations placing this company at a forward price-to-earnings ratio of 4.67, this leader in the industry is at least worth a look.

It is an understatement to suggest ongoing caution for investors in this region of the world. However the markets have clearly discounted some companies to levels that may ultimately prove to be excellent starting points for investors who believe the world isn't about to fall apart tomorrow. Yet as in all situations, it is advised that investors follow up with their own due diligence prior to taking action. It also goes without saying that one should never one exceed their own risk tolerance when making decisions, especially when it pertains to situations that are far from settled.

Disclosure: I am long MT, VE.

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