Europe's struggles make blue chip stocks cheap

[December 06, 2010]  NEW YORK (AP) -- This is a good time to make money off of someone else's misfortune.

One of the best, but rarely followed, rules of investing is to buy when things look bleak. Blue chip stocks in the euro zone are down 5.5 percent since it became clear in mid-April that Greece needed help to prevent it from defaulting on its debt. Some economists speculate that the bailouts of Greece and Ireland mean that the euro won't last much longer.

Investors are waiting to see whether the European Central Bank takes additional steps this week to prevent Europe's financial crisis from spreading to Spain and Italy. That uncertainty has created stock bargains. You may not find the same parade of once-in-a-lifetime deals as during the 2008-2009 financial crisis when General Electric Co. traded as low as $7.06 (it closed at $16.78 on Friday). But the broad retreat from anything associated with Europe means that there are easy pickings.

Take French oil giant Total SA. It has fallen 21 percent this year and is trading at a price-earnings ratio of only 8.3. "The company has become incredibly inexpensive," says Cody Dick, an analyst with Dreyfus Worldwide Growth, a $430 million mutual fund that is buying Total. "When you look at the stock compared to its peers it's been unjustifiably discounted."

At $51.34, the stock costs about what it did during the financial crisis in October 2008. It comes with a dividend yield of 4.9 percent. Competitor BP PLC, meanwhile, doesn't offer a dividend.

Though Total has its headquarters in France, its revenues are global. It drills for oil around the world and can expand regardless of the weak European economy.

Like a parachute strapped onto the back of a runner, concerns that Europe's problems will spread have held back stocks that should have performed better. Britain's Diageo, the world's largest booze company and parent of brands like Johnnie Walker, Jose Cuervo and Guinness, rose 4.3 percent this year.

That is less than half the gain of the broad U.S. stock market, which rose 9.8 percent this year as retail spending increased. The U.S. also happens to be Diageo's most profitable market. Its operating margins here top 35 percent, well above the 20 percent operating margin it averages globally. It recently lowered its prices on its premium brands, which should send sales higher.

Diageo costs $72.67, which is about the same price it did in October 2008. The company is reasonably priced at a 17.5 price-earnings ratio and offers a 4.1 percent dividend yield. That's more than the 3 percent yield offered by a 10-year Treasury bond.

If buying alcohol companies rubs you the wrong way, then you can find a bargain with a staid phone operator. Concerns that Spain will be the next country to need a bailout have pushed the country's stock market down 10 percent over the last month. Telefonica S.A. is down 14 percent over the same time. It costs $69.45 and trades at an 8.8 price-earnings ratio.

While the company operates phone lines and cellular phone networks in Spain, more than 60 percent of its customers live in expanding markets in Latin America. Telefonica is also the second largest wireless company in the United Kingdom and has a large number of customers in Germany and the Czech Republic.

Investors aren't buying Telefonica because they are too fixated on Spain's problems, says Jim Moffett, who manages the $6.9 billion Scout International Fund.

His description of the company could apply to other European blue chips.

"There is more growth there than the market is giving them credit for," he says. "We like them not because they're Spanish but in spite of the fact that they're Spanish. It's a good company in a troubled country."

[Associated Press; DAVID K. RANDALL]

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