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Is Spain a Buy? Depende

April 04, 2013 | About:
Is Spain a buy? In a word, “Sí.” But perhaps a better reply would be “Depende.” After the recent volatility stemming from the Cyprus bailout, Spanish stocks are more attractive than at any other time in 2013. But you shouldn’t buy just anything trading in Madrid. A little selectiveness is warranted.

To start, if a company depends heavily on the local Spanish market, it’s probably best avoided. Last week, Spain’s central bank announced that the Spanish economy remains in siesta mode. By Bank of Spain estimates, the economy will contract by 1.5% , about on par with last year’s decline. The Spanish government had been budgeting a smaller decline, around 0.5%, so the news was not taken well by investors who already have enough to worry about in Europe’s periphery. Making it worse, unemployment was expected to creep up another percentage point to 27%. That’s over three times the (high) American unemployment rate. Ouch.

The good news is that most of the Spanish stocks that have the greatest exposure to the Spanish economy are not ones that you were likely to consider buying anyway. Most trade in the U.S. only as over-the-counter ADRs and don’t have much in the way of trading volume. The Spanish stocks you are most familiar with—such as telecom powerhouse Telefónica (TEF), megabanks Banco Santander (SAN) and Banco Bilbao Vizcaya Argentaria (BBVA) and retail fashion giant Inditex (IDEXY), parent company of the Zara chain—are companies with a truly global footprint that get the bulk of their earnings from outside Spain.

These four companies, along with Spanish oil major Repsol (REPYY), represent nearly 55% of the holdings of the iShares MSCI Spain Index ETF (EWP), the vehicle that most American investors would use to get exposure to the Spanish market.

Suffice it to say, the Spain ETF is not particularly well diversified. This is not necessarily a bad thing, if you are bullish on the largest holdings, as I am. But it is certainly something to keep in mind.

You really have to look to find Spanish companies for which the domestic market matters all that much. Electric utility Iberdrola (IBDRY), the sixth largest holding of EWP, is a case in point. This sleepy power company gets 70% of its profits from outside Spain. Construction and infrastructure company Ferrovial (FRRVY), the eighth largest, is even more international, getting a staggering 85% of its profits from outside Spain.

And Amadeus IT (AMADY), the seventh largest, is hardly a Spanish company at all. Amadeus provides software and IT solutions to the world’s travel industry and, other than its Madrid address, has little to mark it as distinctly Spanish.

So what are a few companies best avoided?

I would start with the local banks. The recent Cyprus bailout, in which large deposit holders effectively had their accounts seized to pay back international lenders, has investors worried that something similar could happen in Spain. This would not affect the large international banks like Santander and BBVA, both of which are healthy. But the banks that cater more to the domestic market—such as Bankia (BNKXF), Banco Popular Espanol (BPESY), CaixaBank (CAIXY) and Banco Espanol de Credito (BNSTY)—are stocks that I would steer clear of for now.

If investor risk appetites return to Spain, these are precisely the stocks that will rally the hardest. But for most investors, I would recommend sticking with the large multinationals that get most of their profits from outside Spain. Here I see the best risk/return tradeoff for the remainder of 2013.

Disclosures: Sizemore Capital is long SAN, BBVA, and TEF.

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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