The European results season kicked off last week with key reports on Bavarian Capacitor and Royal Jellied Eels. OK: I made them up as unfair stereotypes about heavy business. It’s not my fault, I didn’t ask to be born with such contempt for European actions. I’m trying to be interested. When will we have results for the Not Amazon and Didn’t Invent the iPhone regional indicators?
The fact is that if you had money, say, in
iShares Europe
exchange-traded fund, you have underperformed its American counterpart, the
iShares Core S&P 500
ETFs, over the last one, three, five, 10 and 20 years, massively. Of course, this makes the European fund the cheaper of the two relative to profits. But watch out for the growth gap; During the first quarter, European profits would have fallen by 11%, compared to an increase of 3% in the United States.
But JP Morgan is becoming less bearish on Europe. He recently closed his call option on Europe’s underweighting relative to the United States, after a 15% move in his favor since last May. “We believe the period of US earnings outperformance relative to the Eurozone may be coming to an end,” its strategists wrote last week.
The United States took an economic hit thanks to government spending, and its companies benefited from positive sales surprises due to currency effects. Additionally, Magnificent Seven technology stocks have shined, even as earnings growth slows. Without them, first-quarter S&P 500 earnings are expected to fall 2.6%, a fifth straight decline. Even with them, that 3% growth forecast in the first quarter was above 10% last summer. That raises doubts about remaining forecasts that U.S. growth would rebound to double-digit percentages later this year.
If growth isn’t as good as it looks in the United States, it might be less terrible than it looks in Europe. The decline in average incomes is amplified by significant outliers, particularly in the energy and utilities sectors. The median or intermediate income growth rate is 10 points above average, or minus 1%. Meanwhile, Europe is expected to start cutting interest rates sooner than the United States.
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“Better results could in turn generate better relative market performance,” JPM writes of Europe. We will see. For convinced investors, a cheap ETF like the one mentioned above will do the job just fine. JPM also offers stock picks, but not all of them are cheap.
Airbus targets 24 times its profits. Between the two dominant jumbo jet manufacturers, it’s the one that doesn’t make headlines when it comes to parts falling off planes. It would be a competitive advantage if Airbus could make its planes faster. ASML is even more expensive, at 44 times its profits, and makes machines that power Taiwanese factories that turn American semiconductor designs into reality. Novo Nordisk from Denmark
,
at 37 times revenue, makes the obesity drug Wegovy.
I’m sure these companies are well positioned, but looking to Europe to buy shares and then paying a higher earnings multiple than the US market is like paying extra to a home builder without air conditioning .
JPM is also bullish on some cheaper stocks. AstraZeneca makes drugs for diabetes, cancer, heart disease and more. At 17 times earnings, that’s double-digit earnings growth. Deutsche Telekom, whose profit is 12 times higher, derives most of its value from its stake in more expensive T-Mobile US.
.
The German company’s free cash flow is approaching 17% of its market value. UBS completed the acquisition of Credit Suisse last year. A recent stock market valuation of 1.3 times tangible book value, compared to 2.2 times for Morgan Stanley
,
seems low, especially considering an even higher mix than Morgan Stanley of the regular income wealth management business.
Let’s turn to two contrasting cases of analysts sticking with calls that recently went wrong. You’re here
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publishes its results on April 23. Investors will be watching for signs of stagnant demand for electric vehicles and low-cost competition from China. They might also get more colorful commentary from Wedbush; its analyst writes that Tesla’s last two conference calls have been “devastating comedy shows with no adults in the room,” and that the lack of communication “has added fuel to the raging inferno.” He remains at Outperform, citing the “massive value creation” potential of self-driving cars.
Tesla is only the second worst-performing stock in the S&P 500 this year, down 40%. The worst is Globe Life
,
down 47%. The cause is a short selling company called Fuzzy Panda. I don’t really understand how much the term “fuzzy” narrows the field of pandas, but let’s not get distracted.
Fuzzy published a report on Globe on April 11 outlining allegations of fraud, bribery, kickbacks, cocaine and steroid use, and sexual assault among independent agents. The report cites news reports and lawsuits as well as Fuzzy’s own undercover investigation applying for a job. Included are social media photos of brothers chomping on cigars flexing while showing off shiny watches and standing near sports cars, and at one point Fuzzy uses the phrase “giant asset hole,” which I begins to suspect of being a double entender.
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In a statement, Globe called Fuzzy’s report “deliberately false, misleading and defamatory,” with “recycled” points from lawsuits filed by companies to force settlements. It says it has processes in place to investigate allegations of wrongdoing.
JPM writes that “insurance is a contentious business and most of our insurance companies face multiple accusations of inappropriate and fraudulent behavior.” The key, he says, is whether the wrongdoing is limited to independent agents or extends to the company itself. The financial implications, however, are clear – and sadly positive.
You see, Globe’s revenue comes largely from premiums on existing policies, not new ones. So a 10% drop in new business might only affect sales by 1%. And because agent payments are built in from year one, less new business means more free cash flow. And falling stock prices make buybacks more accretive to earnings. JPM forecasts a 110% increase.
Note that Warren Buffett’s Berkshire Hathaway
,
a shareholder for two decades, sold last year at a much higher price due to reports of bad behavior at a major sales agency. This sounds like prudent loss mitigation, or what you might call a no asset hole policy.
Write to Jack Hough at [email protected]