Three quality euro-stocks

European markets are in vogue this year, says professional investor Richard Pease. Here, he picks three above average stocks trading at average prices.

Each week, a professional investor tells us where he'd put his money. This week: Richard Pease, FP CRUX European Special Situations

European markets are in vogue this year and we remain fairly positive in our outlook. Small- and mid-cap valuations are up quite sharply, but the "reflation" trade in banks and resource stocks, particularly, has begun to lag. Compared with last year, there are some economic green shoots emerging: employment is tightening in some European countries and industrial capacity is stretched in some areas.

We focus on high-quality, cash-generative European businesses, typically with significant barriers to entry, conservative balance sheets and proven, well-incentivised management teams. These are often global players with relatively low exposure to western Europe, and which benefit from secular (long-term) trends which are largely independent of the broader economy. We hold a number of stocks that are of much better-than-average quality but which trade at average or below-average prices.

We like Stroeer (Frankfurt: SAX), the dominant out-of-home advertising business in Germany. About half of its business is devoted to billboards and digital signage and the other half to digital and performance marketing. It serves small firms which may not have any advertising capability of their own. This is its way of competing with companies such as Google and Facebook, providing a local "high-touch" service. Stroeer has seen growth of around 5% in its out-of-home business and 10% in digital advertising. Stroeer is currently trading on about 15 times forward earnings, a discount to the wider market.

Ceconomy (Frankfurt: CEC) is the largest electronics retailer in Europe. It performs well against companies such as Amazon, chiefly because the electronics world is very brand-driven. Big brands like Ceconomy because it draws attention to the products rather than the price. Hardware sells at a very slight premium to equivalent hardware on Amazon, but we believe this is more than justified by the level of service. Operating margins are at 3%; we believe they should be 5% over time. The company was a neglected part of a German cash-and-carry business, Metro, but was spun off in July. It has a very strong balance sheet and owns 10% of Metro and 25% of French peer FNAC. The stock trades on about 15 times next year's earnings; about 12 times on a cash-adjusted basis. We think earnings could go much higher.

Finally, we own Tarkett (Paris: TKTT), a flooring business with commercial, residential and sports divisions. The firm is still half owned by its founding family, has stable demand patterns and pricing power, and the industry's highly fragmented nature leaves plenty of room for mergers and acquisitions. The shares have sold off following an anti-trust fine and pressure on its Russian business which now represents only a small part of earnings as well as rising raw-materials costs. We see these as transitory issues, however, and at 15-16 times next year's earnings the stock looks highly attractive.

Recommended

Six high-yielding funds for income investors to buy now
Share tips

Six high-yielding funds for income investors to buy now

Rising interest rates are starting to make many popular income funds look less than attractive. Here, David Stevenson picks six that should weather th…
24 May 2022
Amazon’s shares have fallen hard – value investors should take note
Share tips

Amazon’s shares have fallen hard – value investors should take note

Investors have dumped Amazon shares as post-pandemic life returns to normal. But it still has plenty of competitive advantages, says Russell Hargreave…
23 May 2022
Three high-yielding FTSE 250 dividend stocks I’d invest in right now
Share tips

Three high-yielding FTSE 250 dividend stocks I’d invest in right now

The average FTSE 250 dividend yield is around 2.4%, but many stocks yield much more. Rupert Hargreaves picks the best FTSE 250 stocks for income inves…
23 May 2022
Everything is collapsing at once – here’s what to do about it
Investment strategy

Everything is collapsing at once – here’s what to do about it

Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect th…
23 May 2022

Most Popular

Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022