My Big Fat Greek Deficit

by Tony D'Altorio

My Big Fat Greek Deficit

Tony Daltorio, Investment U Research

Saturday, March 6, 2010

Wall Street seems obsessed with pigs these days.

PIIGS, that is - Portugal, Ireland, Italy, Greece and Spain - the smaller economies in Europe.

Many people worry whether these countries can honor their sovereign debt because of high, already-existing debt levels. And the U.S. Senate might even investigate Goldman Sachs (NYSE: GS) for allegedly hiding Greek debt from European regulators...

Talk about locking the barn door after the Trojan horse has already bolted.

Also foolishly, investors have vilified every single company in those countries. Fears have spread that neighboring economies are suspect as well, by association. And in response, investors have either backed away from that region altogether or full-out shorted related stocks.

Either way, they don't know what they're missing out on. But not to worry. That very panic leaves excellent deals for those smart enough to pick them up.

The Relative Performance of European Companies

Speaking about the situation in Europe, Robert Parkes, equity strategist at HSBC, recently summed it up well:

"The macro factors are affecting the relative performance of companies. Companies in weaker peripheral countries will be hit by their poorer economies. They may also face higher taxes and lose competitiveness with overseas rivals."

For example, just take the relative performance of Portugal Telecom (NYSE: PT) and Deutsche Telecom (NYSE: DT), two large European telecom companies over the past three months.

  • Since the middle of November, PT shares have underperformed rival DT by 5%.

  • During the same time, PT's bond yield widened about 20 basis points versus the benchmark German bund. DT's barely moved.

  • PT's credit default swaps nearly doubled to about 140 basis points. DT's fell from 75 to 70.

And all of this occurred in spite of their similar credit ratings and businesses.

Companies in the utilities and banking sector are showing similar divides across Europe. Since mid-November, the Greek stock market tanked about 25%. Portugal's fell 11%. But France and Germany's dropped a mere 4% and 3% respectively.

So what does that all mean?

It indicates that right now, investors care more about location than balance sheets or earnings.

And that is just plain stupid.

Euro Gems

What sort of companies should investors look to pick up while Wall Street sits transfixed by the repeated showing of My Big Fat Greek Deficit?

Fundamentals are always important. But also look for businesses with big exposure to the emerging markets. Those up-and-coming economies are growing much faster than the industrialized world, which is saddled with high debt.

Despite its base in Greece, Coca-Cola Hellenic Bottling ADR's (NYSE: CCH) share price jumped nearly 10 per cent in the past three months, helped along by continued strong demand for non-alcoholic drinks in countries like Poland.

The previously mentioned Portugal Telecom and its Spanish rival Telefonica ADR (NYSE: TEF) have a large presence in Brazil. And that connection makes them both worth buying into.

Telefonica also controls the Sao Paulo-based, fixed-line phone company, Telesp ADR (NYSE: TSP). And it jointly owns Vivo ADR (NYSE: VIV) - Brazil's largest mobile phone operator - with Portugal Telecom.

If you enjoy playing with more risk, look into large Spanish banks with major exposure to Latin America. That includes Banco Santander ADR (NYSE: STD) and Banco Bilbao ADR (NYSE: BBVA).

Those companies should weather the sovereign risk storms much better than others in the region that focus exclusively on domestic economies.

It comes down to this: If a lot of a company's revenues come from the emerging world, its location is simply not important. So while Greece and the other PIIGS might be in over their heads, the companies based there might not be... especially if they deal with strong economies elsewhere.

Those kinds of businesses have been unjustifiably beaten down and represent excellent buys right now.

Good investing,

Tony Daltorio

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