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NUMBER CRUNCHER

Twenty out-of-favour European stocks with strong prospects Add to ...

We are searching for stocks that appear out of favour and that may be trading at a significant discount to their intrinsic values

Brian Pinchuk is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.

We are living in a world of anemic global growth, yet North American markets continue to march higher and set new records – which appears more a product of richer valuations (multiple expansion) than improving fundamentals. With compelling “value” hard to find in North American markets, we are setting our sights on cheaper hunting grounds – today Europe – to see whether we can unearth some bargains.

What are we looking for?

North American-listed equities of companies headquartered in Europe, which appear out of favour and that may be trading at a significant discount to their intrinsic values.

How we did it

I used the S&P Capital IQ Screener to look for stocks that meet certain value-based financial criteria. My goal was to whittle down Capital IQ’s universe of 15,000-plus North American-listed stocks to European-headquartered companies that may be temporarily out of favour and undervalued.

This is in keeping with the deep value philosophy at Lorne Steinberg Wealth Management: a great company is only a great investment if purchased at a great price.

To turn up prospects, I looked for companies that are not laden in debt and whose revenues are close to recent highs. I also weeded out companies whose earnings have fallen off a cliff (by more than 50 per cent from recent highs).

To make the grade, stocks had to possess favourable value-based metrics, such as relatively low price-to-book multiples. The list was further reduced to companies whose stock prices have dropped significantly (a minimum of 20 per cent) from their three-year high.

The accompanying chart shows the top companies sorted by the lowest forward earnings multiple, a measure that can help point to stock prices that may be undervalued and poised for a rebound.

What we found

The companies listed here are a good starting point for uncovering value. However, numbers only tell part of the story and should only be treated as a compass. When hunting for a discount, one must be mindful that things are often cheap for good reason.

Investors are strongly advised to do their own research before buying any of the stocks listed here.

European value hunt