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Europe Stinks, But These Stocks May Not In 2012

December 13, 2011 4:44 pm
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Those not living in a cave this year know that Europe has been a major albatross on global financial markets. Unfortunately, there’s little reason to believe that situation will suddenly be corrected and that better days lie ahead in 2012.

As measured by the Vanguard MSCI Europe ETF (NYSE: VGK) and the SPDR EURO STOXX 50 ETF (NYSE: FEZ), the performance of many Europe-based blue chips has been nasty this year. Those ETFs are down about 15% and 20%, respectively.

That is the known bad news. On the bright side, an argument can be made that Europe’s sovereign debt crisis has put some of the continent’s better stocks on sale. In other words, some of these names are being adversely impacted by where they call home, not because they’re actually bad stocks. With that, let’s a have a look at five European stocks that might surprise on the upside in 2012.

BHP Billiton (NYSE: BHP):
BHP Billiton, the world’s largest mining company, isn’t based in Europe. The company’s headquarters are in Australia, but its ties to the U.K. run deep. The company’s 20% year-to-date drop isn’t a surprise given the anti-high beta tone markets have been projecting. However, at the end of August, BHP reported record cash flow of $30 billion, the company has raised its dividend and is also expected to sell its diamond mining business.

Expect BHP to ratchet up its share buybacks next year and perhaps the dividend as well. Of course, the company will be remain a major player in global energy and materials acquisitions, but probably more on the oil and natural gas side. The stock is fairly inexpensive at just 13.6 times 2012 earnings.

Royal Dutch Shell (NYSE: RDS-A):
At least Europe’s largest oil company can say it’s positive on the year, up 5%. Then again, that performance really lags those of U.S. rivals Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). Shell does easily trump its U.S. rivals when it comes to yield with a current dividend yield of 4.7%. The company already has a strong balance sheet, but sales of non-essential assets only serve to bolster it.

Catalysts in the new year include the start of drilling in the Beaufort and Chukchi Seas in Alaska and continued robust demand from Asian customers for liquefied natural gas. Shell is a major LNG player in Australia.

Total SA (NYSE: TOT):
For the sake of argument, let’s call Schlumberger (NYSE: SLB) a U.S.-based company. That means that Total, Europe’s third-largest oil company, might just be the only French stock worth owning at the moment. With a yield of almost 6.4%, easily trumps Shell, Exxon and Chevron. The stock is valued at just 1.3 times its in-the-ground assets, according to Joseph Shaefer, and Total’s cash hoard is among the best in the integrated oil space. Expect Total to be an acquirer of more U.S. shale assets in the new year.

With the 2008-2010 dividends being the same, we would argue the French oil giant might just be overdue for a dividend hike when it reports 2011 results.

Nestle (PK: NSRGY):
It might be a case of rising cocoa prices (though they have recently plunged) or just being based in Europe, but for whatever reason, Nestle has been sharply outpaced by Kraft (NYSE: KFT) and General Mills (NYSE: GIS) this year. Nestle, the world’s largest food company, boosted its dividend by 15% earlier this year and has the financial strength to keep rewarding shareholders well into the future. Don’t bet on an acquisition of General Mills though.

SeaDrill (NYSE: SDRL):
SeaDrill is based in Bermuda, but this is really a Norwegian company. It’s also the anti-Transocean (NYSE: RIG). The two companies are direct competitors, but SeaDrill is only down 2% this year compared to a 40% slide for Transocean. SeaDrill’s robust dividend (6.4% yield) is considered safe. Transocean’s is viewed as endangered. Higher oil prices will buoy SeaDrill in 2012 as will investors looking for a more reliable alternative to Transocean.

Bull case:
With this group, there’s obviously a heavy energy and materials bias. That means commodities prices need to rise along investors’ appetite for risk. That said, the dividends are appealing here and it would not be surprising to see at least three increases from this group next year.

Bear case:
Oil prices fall. In the case of Nestle, cocoa and other agriculture commodities prices jump. BHP could risk shareholders’ wrath by overpaying for a big acquisition or not doing one at all.

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