Berko: Advice on foreign stocks
Friday, November 01, 2013 11:04 AM
Dear Mr. Berko:
My new broker believes that the European economy, which has been dead in the water for several years, is headed for a turnaround and has recommended three foreign issues. He recommends that I invest $10,000 in each of the following stocks: 1,000 shares of Kingfisher PLC, 600 shares of Marks and Spencer, and 1,200 shares of Metro AG. I know from a previous email that you prefer not to buy stocks that don’t trade on the New York Stock Exchange. But I need some objective advice (I haven’t used this broker before) and would appreciate your comments on these stocks trading on the over-the-counter market.
B.L., Webster, N.Y.
I think you misinterpreted my email about the New York Stock Exchange. I don’t have a problem with equities that are not listed on the NYSE; rather, I have a problem with thousands of issues that are listed on the Big Board. Years ago, a listing on the NYSE was the gold standard that gave a public company credibility, bragging rights and exclusivity. A NYSE-listed company shared the trading floor (and status by association) with prestigious blue chips, such as General Electric, Monsanto, DuPont, Johnson & Johnson, IBM and Procter & Gamble. In those days, the NYSE was a metaphor for eminence, excellence and prominence. Today the NYSE is a junkyard of crap, teeming with thousands of useless, cockamamie funds issued by BlackRock, Nuveen Investments, Eaton Vance, Barclays and Morgan Stanley, plus a dung heap of esoteric detritus – acronyms and abbreviations such as CYCLES, EAGLES, MTTS, STARS, ELKS, HOLDRs, TOPrS, PCARS and BRIDGES and capital trust certificates, structured obligations and double-short Treasury bonds. The customers get shafted, and the brokers make underwriting fortunes.
I’m usually not enthusiastic about foreign stocks, especially Chinese issues, which I trust as far as I can toss manhole covers. Rather, there are numerous investments right here in the US of A (the above junk excluded) that should merit your attention. I prefer to collect my dividends in dollars rather than dinars or drachmas or deutsche marks. But I applaud your new broker’s thinking. He seems to have an abundance of common sense, and those conservative recommendations are as cool as moonbeams. In fact, a growing number of Europe watchers believe that the European consumer, who has been delaying his purchases, is beginning to loosen his purse strings and make up for the past few years of penury. Those same folks seem to believe that the U.S. market is top-heavy and that there’s better opportunity in European equities than in their American counterparts. And they could be right.
I especially like his Kingfisher (KGFHY-$11.98) selection, which is Europe’s equivalent to Home Depot. KGFHY has 1,381 home improvement stores in the U.K., France, Ireland, Poland and Russia. KGFHY also has an excellent balance sheet and a strong cash position. The European recovery may increase share income by 20 percent on an anticipated 4.8 percent increase in revenues, to $18.4 billion. The 30-cent dividend (yielding 2.5 percent) may increase to 38 cents next year, and the stock could rise to $15 or $16.
Marks and Spencer (MAKSY-$15.38) is a classy $15.7 billion department store with 760 locations in the U.K. and 460 on the Continent and has been in the retail business for more than 100 years. Earnings are expected to increase 11 percent, to $1.14, next year on $16.5 billion in revenues, and the 52-cent dividend, yielding 3.3 percent, may grow to 58 cents. MAKSY has nearly $2 billion in operating cash flow and $3.5 billion in debt. Some MAKSY watchers reckon the stock could trade in the 20-25 percent range next year.
Metro AG (MTTRY-$9.56) is an $85 billion retailer home-ported in Dusseldorf and is Germany’s largest retailer, with more than 2,200 stores, ranging from consumer electronic chains and department stores to self-service wholesalers (like Sam’s Club) that sell bulk merchandise to businesses. MTTRY is on a comeback trail after several years of poor performance. Revenues should grow to $89 billion next year, and earnings may improve to 51 cents; however, the 25-cent dividend, yielding 3.7 percent, probably won’t be increased. Some MTTRY watchers think the stock could trade between $12.50 and $13.50 next year.