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Number Cruncher

Safe-harbour? Welcome to Switzerland Add to ...

What are we looking for?

Stock markets across the euro zone have lost about a fifth of their value in less than a year. The dividend yield across the whole zone is now 4.5 per cent, a level only seen one other time, and just briefly, in the crisis of 2008. According to Graham and Dodd’s epic 1934 book Securities Analysis, on a value basis, European stocks have never been this cheap. Is it time to invest in Europe, and if so, where?

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The Screen

I looked at the top 500 companies around the world, ranked by revenue. It was surprising how many of those companies were Swiss. Switzerland’s economy continues to grow at a fair clip, despite the pressures of the nearby European problems. The country is one of the most wealthy and stable economies in the world. The unemployment rate is a paltry 2.7 per cent, and GDP for the first quarter of 2012 grew the most in over a year. The Swiss enjoy the highest per capita incomes on the planet, the budget is balanced, and the benchmark interest rate is 0 per cent.

In tense economic times, and I remember the soaring inflation of the late 1970s and early ’80s, investors turned to the safe havens of gold, and the Swiss franc. My Wickham colleague Rob Belanger put together a screen of Swiss companies. To be included, these companies had to have a market capitalization of greater than $500-million (U.S.), a dividend yield of more than 2 per cent, a five-year dividend growth rate of over 4 per cent, and at least five analysts had to cover each company.

The price-to-book ratio compares a stock’s market value to its book value. While the average book value of this portfolio is 3.5, a little high, the ratio varies by industry. (The same holds true for price-earnings ratios. Higher P/E ratios suggest investors are expecting higher earnings, yet different industries have different growth prospects. It is not advisable to compare the P/E ratios of a mining company to that of a publishing company.)

What did we find?

Over the past three years Rob found that the annualized rate of return of these 21 companies, on an equal weight, is 16.6 per cent, with an average yield of 3.9 per cent. “This portfolio outperformed the iShares Switzerland ETF,” said Rob. “The top three positions in the ETF, Nestlé, Novartis and Roche, account for 52 per cent of the total weighting.”

The continued effect of a weakened euro, and the franc, coupled with bargain price investments, should provide a double boost when the currencies stabilize, and the investments recover. The Europe trade is not for the faint of heart however, as the continent’s economy is still somewhat shaky, and it would be naive to expect markets to go up in a straight line. Still, a crisis is a terrible thing to waste.

Mr. Bowman is a portfolio manager at Wickham Investment Counsel Inc. in Hamilton.

 

Swiss stocks among the giants

Company Industry Market Cap ( Bil.$) P/E
StMicroelectronics NV Semiconductors 4.28 21.2
Banque Cantonale Vaudois Banks 4.3 14.2
Swisscom AG Fixed Line Telecom 20.03 30
Schweizerische Nat'l V AG Full Line Insurance 0.751 4.5
Garmin Ltd. Telecom Equipment 7.76 13.8
Informa PLC Publishing 2.35 30.9
Novartis AG Pharmaceuticals 150.46 16
Roche Holding AG-Genus. Pharmaceuticals 148.25 15.5
Xstrata PLC General Mining 25.42 6.7
EMS-Chemie Holding AG Specialty Chemical 4.29 18.1

All dollar figures U.S. Source: Bloomberg, Wickham Investment Counsel

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