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Beauty of trashed stocks

Telecom and bank shares might seem unlikely havens amid the current crisis in Europe, but both could be good places to hide while awaiting the verdict on Greece’s status in the euro zone.

Telecom stocks have been unloved for ages, partly owing to mature markets and tight regulation, while bank shares soared in the first couple of months of 2012, only to crash back to earth again.

The Stoxx Europe 600 closed Friday at 242.49 points, up 1.5 per cent on the week, after making a low for the year on May 18. But the telecom sector is down 5.8 per cent since January 1, and the banks sub-sector is off four per cent. Only shares of oil and gas and basic-resources companies have fared worse.

Telecoms and banks aren’t for everyone. Telecom companies could face still more regulation, and banks are difficult to value. The risks associated with banks came into sharp focus Friday when Bankia, Spain’s fourth-largest lender, was approved for an injection of €19 billion ($24 billion) from the government. The bank, which has suffered massive loan losses as a result of the bust in Spain’s real-estate market, was partially nationalized earlier this year. Bankia was downgraded by Standard & Poor’s the same day.

Many professional investors have been sitting on the sidelines, waiting to take their cues from Greece, whose sovereign-debt woes make it increasingly likely the country will leave the euro. Pierre-Yves Gauthier, head of research at AlphaValue in Paris, has met with fund managers in Madrid and London in recent weeks, and detects a change in sentiment for the worse. “They were just panicking,” he reports. Gauthier is looking for contrarian plays because volatile markets mean “smart strategies can’t be implemented.” So he favours what he calls “trashed stocks” that have been oversold and now look cheap. “As a defensive instrument, dividends in telecoms are a sure thing,” says Gauthier. “Banks are a screaming Buy, whatever way you look at it.”

His telecom picks are Belgium’s Mobistar and Spain’s Telefonica, whose American depositary receipts trade in New York. Both companies offer eye-popping yields — Mobistar yields 11 per cent and Telefonica, more than 13 per cent — so don’t be surprised if the payouts are cut at some point. Both stocks are languishing near 52-week lows. Mobistar, whose shares closed Friday at €25.45, trades for 8.6 times estimated 2013 earnings, according to FactSet. Telefonica, which ended the week at €9.61, trades for just 6.6 times estimated 2013 earnings. — Dow Jones

Italy’s Banca Monte dei Paschi di Siena and France’s Credit Agricole are Gauthier’s favourite banks. Banca Monte trades for 33 per cent of book value while Credit Agricole’s price/book ratio is 18 per cent, Gauthier calculates. Credit Agricole’s stock has dropped more than 70 per cent in the past 12 months on worries the bank would lose more than €5 billion on an investment in Greece if the country quits the euro zone. That amount appears fully discounted in the shares, which closed Friday at €2.98. Analysts’ consensus target price for Credit Agricole, as compiled by FactSet, is €5.16.

European politicians failed at a summit last week to come up with a plan to end the region’s crisis. They will meet again in late June, after Greece’s June 17 election re-run, the results of which could help determine whether the country sticks with or abandons the euro.

Germany has been reluctant to make concessions to its eurozone partners because it wants less-disciplined nations to whip their economies into shape themselves rather than rely on bailouts that won’t require them to address their profligate ways. But a political response will require some sort of rebalancing within the euro zone, to Germany’s detriment. It likely would include a growth plan and joint funding for euro-zone members. There is mounting support for common Eurobonds, which would trigger a convergence of bond yields across the euro zone. That would bring down borrowing costs for countries such as Italy and Spain, whose 10-year bonds yield more than five per cent and six per cent, respectively, but increase costs for Germany, which pays less than two per cent on debt of the same maturity. Convergence would be around four per cent, analysts reckon.

Another possibility is giving a banking licence to the European Stability Mechanism, enabling it raise its own funds that could be invested in euro-zone government debt. The effect would be a similar convergence of yields, and Germany would be out of pocket.