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Right
now, these nations are the lowest of the low.
So low, they're referred to as "PIIGS" (an acronym for
Portugal, Ireland, Italy, Greece, Spain). Their equity
markets are among the worst-performing in the developed
world this year. Greece is down -21%, Spain down -17%, and
Portugal down -11%, versus +6% for the S&P 500.
But the good news is the downturn has opened up some
opportunities for bargain hunting -- and these bargains come
with high yields. Right now, these markets are offering some
of the lowest valuations and highest yields in the developed
world.
Spain's Ibex 35 (IBEX) is trading at less than 11 times
earnings and carries an average yield of 6%. Greek's
benchmark ATHEX Composite Index sports a P/E of 10 and an
average yield of over 3%, while Italy's FTSE MIB is trading
at less than 14 times earnings and also yielding 3%.
By comparison, the S&P 500 is priced at 17 times earnings
and offers an average yield of less than 2%.
|
Market |
P/E |
Avg.
Yield |
|
Portugal |
13.0 |
2.6% |
|
Italy |
13.3 |
3.3% |
| Ireland |
N/A |
1.5% |
|
Greece |
9.6 |
3.5% |
|
Spain |
10.7 |
6.0% |
|
S&P 500 |
17.2 |
1.8% |
The
Greek Problem
Of course, investors haven't shunned these markets without
cause. All of the PIIGS suffer from high unemployment, an
increasing number of non-performing bank loans, excessively
high debt-to-GDP and budget deficits, and little or no
growth expectations in the year ahead.
Greece is the weak link in the chain. Its unemployment and
debt levels are not much worse than the other PIIGS, or than
the United States for that matter, but it has the highest
combination of both debt-to-GDP (115.1%) and budget
deficit-to-GDP (13.6%) among these troubled countries.
Exacerbating the problem, Greece bears the lowest credit
ratings in the Eurozone (16 countries which use the euro as
their common currency) and was just downgraded.
And if Greece defaults on its debt, a domino effect
heightens the credit risk throughout the region.
The Opportunity
A joint European Union/International Monetary Fund rescue
plan is in the works. The plan provides $146 billion over
three years in low interest loans to Greece.
Uncertainty over how effective the rescue package actually
will be in staving off a regional credit crisis is keeping
investors on edge. But when the bailout kicks in, and Greece
manages to refinance an initial $11.2 billion 10-year bond
that comes due on May 19th, European markets could get a
lift.
Now, as things appear that they could turn around, is an
opportune time to sort the wheat from the chaff and search
for undervalued stocks that have been unduly tarnished by
their association with PIIGS. The key is to find companies
with strong earnings prospects in spite of -- or even
because of -- the PIIGS' problems.
I've done a bit of digging and found plenty of opportunities
in which income investors can take advantage.
Telecoms: Shares of Spain's telecom provider
Telefonica (NYSE: TEF) are down about -20% this year
and now yield close to 7.5%. The downward trend has tracked
the country's benchmark IBEX 35 Index, which counts the
telecom as its second-largest weighting.
But, in fact, the telecom derives 65% of its revenue outside
of Spain, including 40% from Latin American countries that
are unaffected by Europe's fiscal woes. A weakened euro has
actually proven to be a boon to the company's cash flow.
Meanwhile, several other telecoms in the region also have
worldwide operations in Latin America and other emerging
markets that help insulate them from the troubles at home
(and they trade on the NYSE).
Energy Plays: Many energy companies enjoy the
same international revenue stream as telecom providers. In
fact, Spain's biggest oil company, Repsol YPF (NYSE: REP)
actually derives the bulk of its revenue from a wholly
owned subsidiary -- an Argentine oil and gas producer.
While REP's yield is at roughly 6.0% -- not as high as some
European stocks I've uncovered -- it does represent a chance
to pick up a solid company that's being unfairly lumped in
with the rest of Spain.
Greek Shippers: It would be a mistake to
dismiss certain quality stocks just because they come from
troubled Greece. Greek-based shippers, in particular, are
largely immune to their country's woes thanks to their
international operations. Some have locked in steady cash
flow from long-term contracts with credit-worthy firms from
around the world.
Others, which operate in the volatile "spot" market (in
which rates are determined in a daily basis) are more
dependent on the global economic recovery. But whether they
operate in the spot market or under long-term leases, their
earnings are relatively unaffected by what's happening at
home.
Banks: For a more speculative play, banks in
the region could be worth a look.
Banco Santander (NYSE: STD), still carries a top
notch "A" investment grade credit rating. Yet, as the
largest component of Spain's IBEX 35 Index, the bank has
tracked the index downward with abysmal year-to-date returns.
Despite being Spain's largest bank, about 35% of profits
come from Latin America, where it is also the largest bank
by deposits.
Santander has paid dividends at an increasing rate since
1942 and now yields about 7.5%. The combination of reliable
income and growth potential make Santander a compelling
value play at today's price.
Keep in mind that there's no guarantee that the problems
with the PIIGS are in the past. The road still could be
rocky. But with a plan being put in place to help Greece,
now is the right time to start looking for ways to profit
from a potential rebound.
Good Investing!
Carla Pasternak's Dividend Opportunities
Note: The
companies I shared above are just the tip of the iceberg. In
my May issue of
High-Yield International, I flagged 16 stocks that
are plays on the PIIGS situation -- and they yield up to
11.9%. You can
visit this link to subscribe and access my entire
May issue.
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