This European stock is dirt cheap - you should buy it now

A couple of months ago, I tipped Italian car manufacturer Fiat (MIL: F)

Why? Well, Italy might be mired in recession and struggling with budgetary woes, bet economic reform is continuing. Employment laws are being changed to make the labour market more flexible and meritocratic, which is expected to cut costs and boost productivity. And if Italy leaves the euro, exporters will benefit from a better exchange rate.

All of these factors will help Fiat. Even if you count Chrysler, half of its research and development centres and nearly a third of its workers and plants are still located in Italy.

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However, since I tipped the stock in late March, it has fallen by nearly 15%, even after the recent rally. Ratings agency Fitch recently cut Fiat's credit rating, which didn't help, due to its ownership of Chrysler and fears about growth and market share in Brazil.

So should you take your losses if you bought in, or steer well clear if you didn't? I don't think so. At less than four times earnings, Fiat looks an even better deal now here's why.

Fiat is expanding in Asia

With Europe in recession, Fiat needs to grow its exports to the rest of the world, especially Asia. Earlier this month, it announced an alliance with Mazda to jointly build a two-seat sports car that will be sold in Japan. This is a smart move, as imports make up only a tiny fraction of the Japanese car market.

Fiat is also changing its strategy in India. It has ended its partnership with Tata, which it considers a failure, in favour of taking direct control. The idea is to retain as much of its dealership network as possible, while introducing more brands into the country. One plan is to start selling the Alfa Romeo marque in India. This would take advantage of the fact that the sports car market is expected to grow very strongly over the next few years.

Brazil still has potential

After Germany, Fiat's second-largest market is Brazil. While growth in the Latin American economy has fallen, it is still expected to be at least 2.5% this year. Even though commodity prices are sliding, experts suggest that Brazil's economy can still sustain a long-term growth rate of around 3.5-4%. Indeed, Capital Economics expects it to be 3.8% next year. At the same time the Brazilian government is taking measures to boost car sales by making it easier to take out car loans.

Competition is increasing in the Brazilian car market, which may well hit both margins and profits. However, for now Fiat is still doing well. Indeed, in contrast to Fitch's fears, it is General Motors which is losing market share in the country.

The Fiat Uno has taken the top selling spot from the VW Golf, and Fiat is planning to increase the number of brands of car it sells to increase its appeal. Overall, Fiat now accounts for a quarter of the passenger car and light commercial vehicle market in Brazil.

Things are also looking up for Chrysler, in which Fiat now owns a majority stake. The trade press has praised the new Dodge Dart, which uses technology and designs from both companies. Indeed, one review calls it, "a very impressive sedan that really hits the automotive bull's-eye". As experts point out, Chrysler has had problems with the small car market, so a successful launch would be a major boost for it.

Meanwhile, US car sales are now growing strongly again. In fact, Bloomberg estimates that sales have returned to pre-crisis levels. Of course, part of this is down to a rebound following last year's supply problems. However, Jessica Caldwell of Edmunds.com thinks that easier access to credit has also allowed consumers to start buying again. Chrysler is benefiting from this trend, with estimated sales 30% higher than they were a year ago.

Fiat is risky - but it's still worth a punt

There's no two ways about it; Fiat is clearly a risky investment, particularly given the fragility of the eurozone. However, if you look beyond the short-term factors, it is a strong company that now looks very cheap. Indeed, Fiat is trading at only slightly more than half its book value (its underlying assets), compared to Volkswagen, say, which is valued at only a little less than book value. This difference between the market value and the value of Fiat's assets provides a decent margin of error, so that even if business conditions suddenly worsen, the shares would still look cheap.