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Go to Market for These Little PIIGieS

|Includes: EWI, IRL, Portugal Telecom SGPS SA (PT)

 I’m someone who is chronically early. I can’t stand being late. Whether it’s a party or a meeting, if I’m running late, it drives me insane. So it’s no surprise that when it comes to investing, I also like to get in early. Given my philosophy, if I were late to an investment idea, they’d have to put me in a straight jacket and lock me in a rubber room.


Last week, my colleague, Karim Rahemtulla, highlighted the economic problems of the “PIIGS”– specifically, Portugal, Ireland, Italy, Greece and Spain. Naturally, I’m starting to sniff around for investment ideas, too. But not the ones you might expect.

In keeping with my own contrarian nature and the investment philosophy of The White Cap Research Group, I’m going against the grain. I expect the news to get worse before it gets better for the PIIGS. And while it might not necessarily be “blood in the streets” time just yet (in other words, the best time to buy), it’s a good idea to have some stocks on your radar so you can pull the trigger when the opportunity strikes.

So let’s look at the best ways to profit from the PIIGS nations when the panic level hits the max…

The PIIGS Nations: Collect A 5.8% “Insurance Premium” on Portugal

Having edged higher by 0.7% during the third quarter of 2009, the Portuguese economy ran out of steam over the final three months of the year and remained flat. That sealed the deal for a poor year, with GDP contracting by 2.7%.

In 2010, economists predict more of the same.

But there’s a bright spot amid the gloom and doom. One of the few Portuguese stocks that trade on an American exchange is Portugal Telecom (NYSE: PT). Trading at just 12 times its 2010’s projected earnings, and with earnings growth expected to be about 10%, there’s plenty of room for upside if earnings come in higher than the $0.84 per share that analysts predict.

Plus, it’s well diversified, with operations in Brazil and Africa. And while you wait for the rebound to take effect, PT dishes out a healthy 5.8% dividend yield.

The PIIGS Nations: From Irish Green to Code Red… Playing the Bounce Back

Not so long ago, Ireland was the darling of Europe. In 2006, the economy grew faster than 5%, while the unemployment rate was 4.4%. Economic incentives attracted heavyweight high-tech companies like Dell (Nasdaq: DELL) and Intel (Nasdaq: INTC) and the high-paying jobs that come with them.

But in a stunning reversal, the economy shrank by 7.4% in 2009 and the jobless rate is expected to approach 14% this year.

Even as investors have bailed on the Emerald Isle, it doesn’t mean there aren’t any opportunities left. The New Ireland Fund (NYSE: IRL) is one of them. It’s a closed-end fund, which means that although it’s a mutual fund, it trades like a stock. What’s more, it’s currently trading at about a 14% discount to its net asset value. That’s an even bigger discount than its five-year historical discount of 10.3%.

If panic ensues in Europe, look for the discount to get wider and be ready to gain exposure to Ireland for a significant bargain.

The PIIGS Nations: Missed the U.S. Market Run? Try Italy Instead

How about holding the 2011 Investment U Conference in Tuscany? While I’m dying to help out the Italian economy with a trip there, I don’t think it’s going to happen anytime soon.

That’s too bad because they could use the help. Like Portugal, Italy’s fourth quarter GDP swung to a loss after growing in the third quarter. That resulted in a full-year GDP contraction of 4.9%.

But that doesn’t mean you can’t profit. Remember how the world bailed on the U.S. markets when all hell was breaking loose a year ago? What seemed rational at the time now looks regrettable, as stocks then embarked on a spectacular run for the rest of the 2009.

I’m not saying that Italy will produce the same results, but if the economy rebounds, look for Italian stocks to continue to move higher. And for exposure to Italian stocks, take look at theiShares MSCI Italy Index (NYSE: EWI). It’s an ETF, which aims to replicate the performance of the MSCI Italy Index and holds a basket of stocks on the Milan Stock Exchange.

To sweeten the deal while we wait for Italy’s rebound to kick in, EWI boasts a cheap 0.59% expense ratio and a 2.4% yield.

The PIIGS Nations: The Ultimate Contrarian Play Right Now… in Greece

The current fiscal woe in Greece has brought the “PIIGS’” problems to the forefront of the economic world.

Having racked up huge deficits – and with seemingly no way to pay the bills – the country’s crisis is deepening. It needs a bailout – and it appears the European Union will provide one.

With that said, the last company you’d want to invest in would be the National Bank of Greece (NYSE: NBG). Right?

Admittedly, there is some risk here. But if you’re looking for an uber-contrarian pick, this is it. And there are some factors in your favor…

  • NBG (and other Greek banks) has less credit exposure in its own country than banks in France, Switzerland and Germany.
  • With the share price having halved since October, the stock currently trades at just seven times this year’s projected earnings (which are expected to decline in 2010). Further weakness could represent an excellent buying opportunity for a company that has been labeled “the JP Morgan (NYSE: JPM) of Greece.”

The PIIGS Nations: Labor Woes Scorch Spain

While Greece has received all the negative headlines recently, Spain is arguably in the worst shape of the PIIGS.

The country’s unemployment rate has ballooned to a whopping 19.5% (even worse among young people looking for work – 35%). What’s more, the high wage -low-productivity equation isn’t exactly conducive to growth. But Prime Minister Jose Luis Rodriguez Zapatero appears incapable of handling the situation, blaming a plot by “the Anglo-Saxon press” for the decline in the euro.

With things looking so bleak, a contrarian should be eyeballing the Spanish market. Consider taking the same approach as with Ireland and look at a closed-end fund like the Ibero-America Fund (NYSE: SNF). It’s currently trading at a 15% discount to its net asset value, versus a five and 10-year historical average of about a 6% premium. That’s a wide difference. If Spain stabilizes and the fund returns to its historical average, that swing from discount to premium could buy a lot of tapas.

While SNF coughs up a healthy 10.5% dividend and has a reasonable expense ratio, you’ll be getting in early on Spain. But then again, early is on time in my book.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld



Disclosure: No Positions