Investing in Telefonica Stock (NYSE:TEF)

by Louis Basenese

Investing in Telefonica Stock (NYSE:TEF)

by Louis Basenese, Wall Street Daily Chief Investment Strategist

Friday, September 16, 2011

It's Time to Go Dumpster Diving (Again) in Europe

In the summer of 2010, the contrarian in me was salivating over the opportunity in Europe.

Then, much like now, the eurozone was in an awful tailspin. The culprit? Fears over a sovereign debt contagion.

Go figure, but that's exactly what's weighing on the markets again. As MarketWatch reports, "European stock markets fell sharply on Monday on increased fears that Greece is headed for a default."

So much for time healing all wounds! Despite multiple rounds of bailouts, we're literally right back where we were a little over a year ago.

Instead of begrudging the lack of progress, though, we need to embrace the opportunity. Because many blue-chip European companies with rock-solid fundamentals are getting unfairly punished.

And there's one in particular that represents an opportunity too good to pass up...

Dialing Up Double-Digit Gains and Yields in Spain

My favorite beaten-down European stock right now is Telefonica (NYSE: TEF), the biggest telephone company in Spain.

Ever since Euro Crisis 2.0 hit, the stock's off about 34%. And that's almost exactly the amount the stock fell during Euro Crisis 1.0, before snapping back 48%. Take a look:

telefonica chart

I'm convinced that the stage is set for exactly the same type of rebound. And if you're not interested in earning a potential 48% profit - in a short period of time - you need to get your pulse checked.

A Rare Recession (and Euro Crisis) Resistant Dividend Stock

In addition to being Spain's dominant phone company, Telefonica is also the largest wireless provider in Britain. It's a major player in Latin America, too, particularly in Brazil.

And no matter what's going on in the world or currency markets, people aren't going to suddenly give up their telephones, mobile phones, or broadband internet connections.

They didn't in the throes of the 2008 global downturn. They didn't last summer. And they won't do it this go-round, either.

At worst, the company might suffer a 1% to 3% drop in sales. But that's hardly enough to justify the current selloff in shares.

If you need more tangible proof, take a look at Telefonica's track record.

The company has increased its sales by an average of about 12% per year, since 2002. Pulling off such a feat doesn't happen unless you operate a business with steady, undeterred and growing demand.

But demand aside, the real reason the latest euro crisis won't torpedo Telefonica's business is simply because the majority of the company's sales - around 60% - don't even come from the eurozone. They come from Latin American markets, which boast some of the strongest growth potential in the world.

So if anything, Telefonica is actually shielded from the collapsing value of the euro. (Remember, a weaker euro leads to a fatter bottom line, as the company enjoys gains on overseas profits, thanks to currency translation.)

Clueless investors are, of course, overlooking this reality. But let's not be so myopic or foolish.

In the end, Telefonica represents one of the bluest-of-blue-chip stocks in the market. It operates a simple business with ever-steady demand. And it spins off gobs of cash - almost $17 billion in the last 12 months - which management kindly returns to shareholders via dividends.

Mind you, after the latest selloff, Telefonica now sports a safe and attractive 9.5% yield.

The fact that the stock's trading on the super cheap, too, only makes the opportunity more irresistible.

At current prices, Telefonica trades at a price-to-earnings (P/E) ratio of just 6.22, which is about 50% cheaper than the average stock in the S&P 500 and well below the company's five-year average P/E ratio of 11.5.

Bottom line: The thought of buying any European stock right now might be downright repulsive. But the 34% selloff in shares of Telefonica since Euro Crisis 2.0 began is flat out unjustified. So hold your nose and don't let this rare opportunity for double-digit gains (and yields) pass you by.

Ahead of the tape,

Louis Basenese

Original article reprinted with permission from Wall Street Daily.

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