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Time to go Bargain Hunting in Europe

April 13, 2012 | About:
With volatility erupting out of Europe again, investors are left to wonder: Is this an opportunity to buy at attractive prices all of those great stocks that “got away from you” in the first quarter run-up, or is it portent of nasty things to come? It would appear to be a little of both.

Even before the five-day selling spree, stocks were reasonably priced compared to historical measures, and they were downright cheap when compared to bonds and other common asset classes. When you combine this with the generally gloomy sentiment towards stocks that has persisted for much of the past year, your risk of significant loss in a high-quality stock portfolio is almost nil.

Can stocks go from cheap to cheaper? Absolutely. It happens all the time. But the conditions for a real bear market are simply not in place. Fed policy remains loose, inflation remains largely tame, and stocks are cheap and underowned by individual investors and professionals alike. These would be the conditions I would look for in a new bull market, not a bear market.

Still, after rising 28 percent from the 2011 Euro-crisis lows, stocks were due for a breather. After returning 12 percent in the first quarter, the S&P 500 had already exceeded the returns that most analysts expected for the entire year.

This is where that “nasty portent of things to come” comes into play. To borrow a quote from Lord Byron, it appears that the equity markets have “squandered their whole summer while ’twas May,” or more accurately April in this case. As a result, I expect the major indices to move sideways in a choppy, range-bound market for most of the second quarter or until the latest scare coming out of Europe subsides.

Given this, how are investors to position their portfolios?

In a range-bound market, you can make money in one of two ways. You either actively trade, attempting to buy at short-term lows and sell at short-term highs. Or, you can orient your portfolio towards dividend-paying sectors and simply collect your checks while waiting for prices to firm up. For the bulk of your nest egg, it is this second course of action I would recommend. This is the approach I have taken in my Tactical ETF Portfolio in holding the Wisdom Tree Large Cap Growth ETF (DLN) and the PowerShares International Dividend Achievers ETF (PID).

For more active trading, investors might consider a contrarian bet on Spain. I wrote favorably about Spain at the beginning of the quarter (see “Eurozone Member to Watch: Spain”), and I would reiterate this view today. Spain has some of the cheapest stock prices and highest dividend yields in the world today, and Spanish firms outside of the construction sector tend to get a significant percentage of their revenues from outside the crisis-wracked country.

Keep the faith, dear reader. There is money to be made in this market.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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Comments

KelpieCapital
KelpieCapital - 2 years ago
Thanks Charles, I mostly agree with you...

I posted something similar back in December....

http://kelpie-capital.com/2011/12/12/europe-be-greedy-when-others-are-fearful/

I currently have a 7% allocation to European equities which may increase over time. The CAPE of the MSCI Europe is about 30-40% lower than the US.

I would look at Gigaset DE ( http://www.aboveaverageodds.com/2011/08/10/gigaset-de-aqu-unsustainably-cheap-under-any-scenario/ )

and some of the investment holdings companies which have pretty spectacular discounts on already cheap stocks like (Orkla, GBL, Pargesa etc)

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