According to GuruFocus' global market valuation pages, several major European stock markets like Spain, France and Italy are undervalued as the continent grapples with resurging cases of the coronavirus.
On Monday, the pan-European Stoxx 600 index closed at 355.95, down 1.81% provisionally as European countries battle a "second wave" of new coronavirus cases. The French health ministry said in a statement on Sunday that new coronavirus cases over the weekend propelled total cases to over 1.1 million, topping the number of cases in Spain and Argentina.
German software company drags down European tech sector
Shares of German software company SAP SE (SAP, Financial) closed at $115.02, down 23.16% from last Friday's close of $149.68 on the heels of warning that it may not achieve key revenue targets for one to two years beyond the expected date of first-half 2021 due to headwinds stemming from the Covid-19 pandemic. The shares are modestly undervalued based on the company's current price-to-GF Value ratio of 0.85.
GuruFocus ranks SAP's profitability 9 out of 10, driven by a four-star business predictability rank, a high Piotroski F-score of 8 and an operating margin that is outperforming over 91% of global competitors despite contracting approximately 4.4% per year on average over the past five years. Despite this, the company warned that non-IFRS revenues for full-year 2020 could tumble from between 27.8 million euros and 28.5 million euros ( $32.84 million and $33.66 million) to between 27.2 million euros and 27.8 million euros.
Gurus with large holdings in SAP include Ken Fisher (Trades, Portfolio)'s Fisher Investments, Sarah Ketterer (Trades, Portfolio)'s Causeway Capital Management and Chris Davis (Trades, Portfolio)' Davis Select Advisors.
German market remains modestly overvalued
Despite shares of SAP tumbling, the German market is modestly overvalued based on Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)'s concept of market valuations. The ratio of total market cap to gross domestic product for Germany stands at 44.33%, above the 20-year mean of 37.55% but below the 20-year high of 57.84%.
Based on the current market valuation level, the expected return of the German stock market is 4.2% per year over the next eight years, including contributions from dividends and business growth.
Spain leads European "developed" markets in terms of market returns
Spain's market valuation level of 48.25% is near a 20-year low, suggesting significant undervaluation. Assuming a reversion to the 20-year mean of 88.67%, the contribution to expected market return over the next eight years is 7.9% per year, yielding a total return of 13.40% per year including dividends and business growth.
Spain's projected market return is second among developed markets, with Singapore's return of 16.3% leading the pack. Likewise, Italy's projected market return of 9.9% per year includes a contribution of 5.37% assuming that market valuations reverse to the 20-year mean of 19.42% from the current level of 9.36%.
France's projected market return of 5.8% per year includes a contribution of 1.75% assuming a reversion to the 20-year mean of 88.59% from the current level of 77.13%. Dividend yields of 2.24% and business growth of 1.79% represent the remaining portion of market returns.
See also
GuruFocus is beginning a new YouTube Channel series that aims to seek good value investing opportunities around the globe, including major European markets like Spain, France, Italy and Germany. The video series will apply Buffett's key criteria of predictable revenue and earnings growth, positive and growing operating margins.
Disclosure: No positions.
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