Euro stocks for yield, growth, and value

But what stock picking strategies are likely to prosper most during such eventful times? Rather than go for just one screen, I’ve run four separate screens to try to find several types of interesting equity plays exposed to the region. The themes my four screens take in are: growth at a reasonable price based on the techniques espoused by John Neff; a contrarian value approach looking for low enterprise-value-to-sales stocks, which draws on the wisdom of Ken Fisher; my own 'Have-It-All' share screen, which looks for a bit of everything; and a screen that tries to identify secure and attractive dividend yields. All the screens have developed decent track records while I've been running them on the UK stock market and have track records of at least three years.

The excitement about Europe has been building for some time in anticipation of the QE package that was announced on 22 January. While there are mixed views on the real economic benefit of this extraordinary, but increasingly de riguer, monetary policy, there is little argument that its US and UK manifestations have benefited asset prices, including equities. Therefore, the ECB's current €60bn-a-month spendathon should, broadly-speaking, be good news for anyone investing in the region. The counterpoint is that loose monetary policy creates downward currency pressure, and the euro is already at an 11-year low.

The shares I am looking for are those of companies that report in euros and are part of the S&P Europe BMI index, which contains 1,780 companies. The index covers all of Europe, which means some companies screened will be listed on exchanges that are in non-eurozone countries. But I have taken the fact that these companies report in euros as an indication that they have high exposure to the region and its currency. Despite this large hunting ground some of my screens have not found any stocks that satisfy all of their criteria and in these cases I have allowed stocks to fail one or two of a screen's tests in order to get a decent amount of results. The screens are as follows:

Neff

Legendary fund manager John Neff found investment fame during the 31 years he spent at the helm of the Vanguard Windsor fund. His style is conventionally portrayed as dull as it eschews highly-priced flashy stocks. However, he is a growth-focused investor who is interested in growth at the right price. While that often means buying into the market's less-glamorous stocks, such stocks can produce very starry returns. The screening criteria are:

Contrarian

This screen focuses on stocks that are cheap compared with sales, and where there are grounds to hope the company concerned can boost the profitability generated from those sales to a decent level. The screen is based on the ideas of US investor Ken Fisher. In order to see whether lowly valued sales may be pointing to hidden earnings potential, the screen looks at historic margins as well as recent and forecast sales growth. If margins have been high in the past and sales are on the up, then the inherent value in a company's sales may soon show up as profit. The screening criteria are:

Have-it-all

My have-it-all screen is an exercise in cramming as many desirable fundamental characteristics as possible into a single screen. Because the screen asks for so much, though, it does not ask for too much on any single count. What's more, the screen makes fairly base demands with little in the way of more sophisticated fundamental analysis. Despite these limitations, I have struggled to find stocks to meet all the screen's criteria so I am allowing stocks to fail one of the two valuation criteria (lowest-third forecast PE or highest-third dividend yield) and one of the supplementary tests. The screening criteria are:

Safe Yields

This screen was the least productive of the four screens I've run producing only three results (and that's after watering the original screen down). The focus of the screen is to look for solid signs that the dividend being paid out is sustainable and likely to grow. That means good cash conversion, good interest cover and healthy dividend cover along with an encouraging track record and forecasts. Stocks also have to be low beta which is taken as an indication that they are less cyclical than most. Stocks have to pass the dividend yield and dividend cover tests, but have been allowed to fail two of the screen’s other tests. The screening criteria are:

I've highlighted one stock from each screen in the write-ups below, and the other qualifying stocks are listed in the accompanying tables.

Neff

Deutsche EuroShop

If QE is able to reinvigorate the fortunes of the European man on the street, then shopping centres should prosper. But even if consumers don't feel better off, it is likely that QE will push up a range of European asset prices as it has done in the UK and US, and the prices of shopping centres should benefit. That's good news for Deutsche EuroShop, which has investments in 19 shopping centres in Germany, Austria, Poland and Hungary.

Underlying trading at the company looks good and like-for-like rents were up a decent 2 per cent when the company reported third quarter numbers in November but the real driver of profit growth recently has been the group's 2013 acquisition of a Dresden shopping centre, Altmarkt-Galerie. The company's portfolio boasts near 100 per cent occupancy and a diverse range of tenants. The group focuses on investing in prime locations and such properties look among the more likely to benefit from any upward asset-price pressure that comes about from QE.

Source:S&P CapitalIQ

Contrarian

Technip

As a contrarian play, Technip certainly fits the bill. As an oil services company, its business is particularly sensitive to the oil price, as lower prices could cause its clients to pull the projects on which it works. Indeed, the shares have already tumbled on dire sentiment towards the sector and look cheap on most conventional measures. While the shares are certainly cheap for a reason, there are grounds to hope Technip can make the best of its bad situation. The group boasts a solid balance sheet, which is likely to be important in its industry over coming years. Management, meanwhile, is keen to diversify the business into new areas in order to achieve growth. And while the group did suffer a setback on this front last year with the abandonment of its mooted bid for CGG, not going ahead with the acquisition leaves it financially stronger and more able to pursue organic growth opportunities.

Earnings forecasts have been reducing recently, and while the table below still shows growth over the next two fiscal years to be reported (one of these is the year completed at the end of 2014), expectations are that earnings will drop in 2016. That said, should the market start viewing Technip's end markets more positively, there could be some major upside from the shares' current depressed levels.

Source:S&P CapitalIQ

Have-it-all

Daimler

Should the ECB's monetary experiment boost the economies of the eurozone, it should certainly be more fuel in the tank for car, truck and bus maker Daimler. But the company has been motoring along quite nicely for some time now. While some of its end markets remain soggy, such as truck sales in Europe and Brazil, overall demand has been good. In particular, the company's new range of Mercedes Benz cars is proving popular with customers.

Self-help is also playing a role in Daimler's improving fortunes. The company is benefiting from a €4bn efficiency plan and the full effects of this should be felt in the current year. Management has also hinted that it will be looking to make further savings in the future. And cash generation has been extremely impressive recently with the group reporting that net cash was at record levels (€17.9bn) at the third-quarter stage. As well as supporting dividend payments, the money should bolster the group’s financial services division and last month €2.5bn was put into the group’s pension scheme.

Source:S&P CapitalIQ

Safe Yields

Michelin

French tyre giant Michelin cited weak European truck demand as one of the reasons for it reporting disappointing third quarter sales last year. The company is also battling against slower emerging market demand and competition from lower-end tyre makers. This has all resulted in pricing pressure, although some of the recent sales weakness is due to lower raw material prices being passed on to customers. Michelin’s troubles have been underlined by management’s decision to reduce its sales guidance and to cut capital expenditure from the current level of about €2bn to €1.5-€1.7bn come 2017.

Given the gloomy backdrop and what looks like a prudent stance adopted by management, the group's shares could be a major beneficiary if the ECB's recent action is able to pep-up the eurozone economy. The falling oil price, which is a major influence on input costs, also has the potential to help Michelin. That said, the company tends to pass on much of any benefit to its customers. And while recent news flow may have been disappointing, the company is still expected to grow earnings in coming years.

Source:S&P CapitalIQ