Taking Stock

Tony Crowell

The Gain From Spain Goes Mainly To The Sane

The price swings of the last few years produced emotional swings. They also have created some remarkable valuations, both in bargain prices and wild overpayments. Three years ago, with the financial crisis in full outcry, Bank of America paid $50 billion for Merrill Lynch. Its then CEO drove this transaction through with an excess of hubris, adding almost a trillion dollars of assets to B of A’s balance sheet, of which tens of billions were toxic assets.

In contrast, Barclays picked up the investment banking and capital operations of Lehman Brothers for a mere $250 million. Barclays got Lehman from the bankruptcy court, thus avoiding assuming its liabilities. It now ranks among the top ten in U.S. underwriting activity. While Merrill is making substantial contributions to B of A’s profits, its hidden balance sheet liabilities persist. These become more acute in view of the lurking Countrywide liabilities that B of A took on by buying that ill-led lender’s vast amount of shaky assets and unknown liabilities.

Even supposedly conservative Swiss bankers allowed an unsupervised young trader to make over $2 billion losing bets. Unlike activities like offshore oil drilling, where blunders can be immediately evident, bankers can sometimes conceal their misjudgments, hoping a return to robust economic times will bail them out. Pending such a robust return, banking stocks lack appeal, even Barclays (BCS-$10) and certainly not B of A.

With news breaking daily of possible debt defaults in Europe, even very solid European based stocks have been knocked down to bargain levels. Telefonica (TEF-$19), the large Madrid-based mobile, Internet and telephone company, is a prime example. Sales are $88 billion, growing over the last five years at 17% annually year. Earnings are strong and will be about $2.50 a share this year but its stock price is down from $27 on fears about the Spanish economy and its 20% unemployment rate.

These fears are almost irrelevant. Telefonica gets only 31% of its revenues from Spain with the rest from Latin America and Europe. It is, for example, the largest wireless carrier in the U.K. Like many European companies, it pays two dividends a year. If it keeps its December payment at $.90, the same as last year, then 2011 payments will total $1.97, a yield of 10%. Its stock price will probably bounce around as skittish investors flee from scary headlines but those who stick should enjoy a very attractive yield with decent prospects of capital gain.

Even stocks of companies based in European countries with strong fiscal policies have suffered in the general panicked sell-off. Germany’s huge Siemens (SI-$93) will report $108 billion in sales, up 5%, yet its stock has lost a third of its value since spring. Yield is 3%.

Medical stocks provide some protection against cyclical buffeting. Danish-based Nov-Nordisk (NVO-$99) and Swiss-based Novartis (NVS-$55) are among the largest positions in my clients’ portfolios. Each is producing rising worldwide sales together with increasing earnings and dividends. Novo-Nordisk is showing unusually strong demand for its diabetes treatments in developing economies. Novartis expects to become the global leader in eye care as it integrates its recent purchase of Alcon. Both are buys.

Norway’s Statoil (STO-$22) is an overlooked international oil company. Sales are over $100 billion, growing at over 20% and its rapidly increasing earnings give it a P/E ratio of only six. Current yield is 4%. Like all oil companies, its results are shaped by world oil prices and by its exploration results. Both point to further gains ahead. Oil production from its home waters off Norway peaked a few years ago and the company has been expanding in all oil producing areas of the world. Recent investments in Brazil and the Arctic should add substantially to production beginning in 2012.

All five of these companies combine strong balance sheets, rising sales and earnings and above average dividend income. Their global market and financial strengths renders them almost immune to the fiscal and currency squabbling that dominates the current business news from Europe. Their stock price choppiness could persist for months but savvy investors should use this period to benefit from the anxieties of others. These Old World stock aristocrats will enhance the quality and income of stock portfolios



Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com




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