Every so often the reader suggests that I describe the book on investment. Obviously, they confuse you with someone else, I hear you laugh. Why don’t you call it: “How to miss wealth in US stocks.” Very funny.
In any case, relax. I wouldn’t dare. My old colleague from the Lex column, Spencer Jakab, has already written the best investment book ever. Her name is Heads I win, tails i winAnd you should own a copy.
I only mention it while thinking about Spencer on Monday. Whenever the S&P 500 had a fall during the financial crisis, he would knock his hand into his mouth and shout “Wood!” through the editorial staff.
Then Robert Armstrong and I knew things were bad. Did Spencer give the same cry this week? Maybe they will send me an e -hast so I can tell you in any case. His market time is usually common.
But now I can wait. I promised a another column about European stocks and what to do so far. Previously, we covered the reasons why they started to look interesting despite the wide darkness.
And also why didn’t I buy them last May? Is it too late now? Or are European stocks still attractive? How best to judge the latter? Opposite your own history, other stocks, something else?
That’s a lot of questions, so let’s start. The first analysis I like to work when the market is hot is to see what people are staring at. I don’t mean topics – they are obvious in this case. European long effect. Trump’s long poker.
No, I wonder what the so -called “capital factors” moved the shares prices. Maybe these are differences in sales growth. Or what supplies have already achieved good or not – swing in other words.
Size is another factor. Such as the quality of earnings. But after I briefly with the IQ capital database for a while, an overwhelming culprit – from January 1, when European shares really started flying. It’s none of that.
Mostly investors focus on value. Indeed, seven of the top 10 sub -factors (out of 30 total) when it comes to creating the widest gap between the best and worst yields, are measuring evaluation data.
Price to earnings. Price to cash flow. Sales relative to the value of capital plus debt. Price to reserve. Such are the type of ratio that has launched performance. Investors may have fallen for Europe. But that’s the price they love the most.
They are not in awe of the economic story either, it seems – even if Germany proposes serious Fiscal time. The long -term growth factor was the fourth until the last explanation of the discount dispersion.
Such an analysis can seem nervous. But it helps to support a few simple and positive observations. The first opposes the idea that recovery in European stocks is just a recurrence story.
Certainly, the defense supplies shot this year. But shores The fifth, while telecommunications and insurance, as well as chemical sectors, saw a double -digit refund. And in every sector, he did cheaply.
The second move suggests that the rally could last. Valuation is usually a powerful factor early in any rise. After making some money, investors then began to look at capital efficiency, the quality of earnings, momentum and so on.
We are not there yet. But when we are, Europe must be delivered. For example, US stocks have not been underrated for more than a decade. But they justified their luxury prices with each knockout.
Because you are cheap, she just gets you – as my daughter soon found out after discovering the topic. Shit is shit. Are the basics of European companies solid enough after this first phase of re -evaluating?
Before we answer, is this first phase even completed? The Stoxx 600 ratio/earning ratio (that is, using expected rather than historical profits) is now 14.5 times, compared to 11 times two years ago.
And the average of this millennium is exactly the same. On this basis, European supplies are no longer cheap than history. You could, however, claim that the odds today is much better.
Of course, the width of growing audits to Estimation in Europe is stronger than anywhere else in the world, according to FactSet data (audits are actually reduced in USA, the emergence markets).
How do continental companies agree with other measuring data overall – especially opposite the US? Yes, a return on capital will increase from 12 to 13 percent this year; But S&P 500 companies generate 19 percent for shareholders.
Likewise, the ratios of long and profit (after adapting to the tax, depreciation and depreciation) fall in Europe nicely. But it is still predicted that there will be double levels in the US.
In the meantime, US companies are twice the amount of money compared to their market capitalization, and their operating margins are 2 percentage points higher – although it is predicted that Europe will increase by a third of this year.
Of course, all this could encourage you. There is upside down that the executives thought about their C-SUITE from Amsterdam to Zurich. Can I produce goods? Where to start? And what should we look out for?
I will monitor what is the most vulnerable statistics for me when it comes to US and European companies: their payment ratios. S&P 500 returns 35 percent of its earnings to dividend and buy -in shareholders. For Stoxx 600, this is almost 60 percent.
Simply put, American bosses invest more in the future of their business. European, on the other hand, they almost say, “We don’t see exciting options. Here’s the return of your money.”
Only when you see that this ratio will fall on the continent to know that it is properly involved. Until then, Europe is just playing for evaluation.
He is the author of a former portfolio manager. E -stio: Stuart.kirk@ft.com; X: @stuartkirk
