Take your chance on Europe
“If you change your mind, I’m the first in line / Honey I’m still free, take a chance on me.” Somewhere above the Atlantic Ocean, between New York and Dublin, I just couldn’t get the Abba classic out of my mind when thinking of which stock I’d recommend buying in the coming quarter.
No, it wasn’t Abba’s music record label, Universal, or their “Mamma Mia” Broadway producer, Littlestar, that brought me in a state of ecstasy up in the air. It was Barclay’s, one of Europe’s largest banks, traded partially on the New York Stock Exchange.
Before I get into detail why Barclay’s made me think about the song, let me outline the core principles of my investment thesis. Then, let me explain how this led me to pick Barclay’s.
The first principle of my thesis is that for a good deal, you have to look for a deep dip. Just like Quentin Tarantino did with John Travolta and Mickey Rourke in the movie industry, or the famous AC Milan team with the Brazilian strikers Robinho and Ronaldinho in soccer, the best investors in the stock market are those who pick up assets that are intrinsically undervalued, and are able to boost them back to their full potential.
In the case of stock investing, the best example of such a value investor is Warren Buffett, who beat the market almost consistently over the last couple of decades. Following the legendary mantra “the lower stocks go, the more I buy,” the Oracle from Omaha buys stocks when everyone else is selling them –and takes the profit home when the companies recover.
From the “buy low” perspective, the current best deals are European bank shares. They took heavy hits in last year’s stock market. Exposed to Greek and other PIGS’ bonds, the stocks of Societe Generale, Deutsche Bank and Banca Intesa/SanPaolo fell by at least 50% between February and September of last year.
But that is not to say these companies are inherently weak. The banks are called “systemic” because of their magnitude and crucial function for the European economies. That means that if one of the European economies turns sour, like Greece, Italy and Spain did last year, they’re taking a hit as well. But the opposite is also true. If the euro zone bounces back from their “enfant terrible”’ fiscal problems, the banks will easily return to profits and growth as well.
This where it gets interesting: after a rollercoaster that lasted well over a year, Europe seems at last to have found a steady ground in the last couple of weeks, and prepares for a landing. That leads to positive points for my second investment principle: look out for signs that hint on potential positive changes ahead.
In Italy, for example, the yields on 3 year long government bonds has fallen to less than 2.5% whereas it was at a dazzling 8% just a few months ago, in November. The country is seen as pivotal in the euro crisis, as it is the euro zone’s 3th largest economy, and in so far an indicator that the end of the tunnel is in sight for the euro’s problems.
And more crucial developments are ahead, that could change investors’ sentiments on bank shares. On March 8, private bondholders of Greek debt have to renew their credit to the country of Helena and Heracles. If more than 90% of them do, a milestone is reached for restoring confidence in Greece, and more importantly, the eurozone as a whole. The rating agencies Fitch, Standard & Poor’s and Moody’s already announced they would review Greece’s credit rating after this day.
The recent developments are in great part due to political efforts to alter the faith of Europe’s economy. That European leaders are more confident now than they were months ago, becomes clear from their statements.
Herman Van Rompuy, the recently re-elected European president raised confidence last week. “I think that if we in the next weeks – and there’s really a good perspective for that – we can leave the Greek crisis behind us, then we will be in calmer financial water for a long time,” he said in an interview to the Belgian state television.
The French President Nicolas Sarkozy was bolder in his statement after last week’s European summit: “we are turning the page of the financial crisis,” he told reporters after an agreement was reached on the Greek debt restructuring
In sum, maybe it’s time we change our mind about Europe’s financial stocks, and take a chance on them for the months to come. From that perspective, I choose Barclay’s as my preferred stock for the next two months.
Following the trend in the European banking industry, Barclay’s lost 60% of its value from February to September of last year. Its high exposure to Italian debt and its ties with the European mainland are largely explanatory for that. The flipside of that coin is that the company is very likely to follow the positive trend as well, should that arise in the next few weeks.
Whether Abba thinks the same about Barclay’s is hard to say, but their songs did convince me to go for the British bank: there’s money, money, money involved and in this game, the winner takes it all. Time to take your chance on Barclay’s, I’d say.