No Blood in Irish Streets – But There Is In Spain

As investors, we should never let a good crisis go to waste.  "The time to
buy," Baron Rothschild recounted long ago, "is when there is blood in the
streetseven if it is your own." That means the Irish debt crisis and Spain
debt woes should be seen as an opportunity to buy stocks there. I opened the
June 2010 issue of the Sizemore Investment Letter with this same quote.  As
much as I hate to recycle good one-liners, I do it today for a reason.  You
see, in late spring of this year the European sovereign debt crisis rippled
through the world economy, creating great buying opportunities in companies like
Telefónica (NYSE: TEF ), the Spanish-based global telecommunications firm .
After months of relative quiet—in which Telefónica and other solid European
blue chips had a great run—we're right back where we started.  The global
economy is being shaken again by European sovereign debt woes, this time
centered on Ireland.  To quote Yogi Berra, "It's déjà vu all over
again." So, as the markets sold off in anticipation of the Irish bailout, I
decided to go investment fishing in the eye of the storm—Ireland herself. Few
stock markets have taken as much abuse in recent years as the former "Celtic
Tiger." The Irish stock index fell a full 80% from peak to trough. Yet
remarkably, Irish stocks never got particularly cheap.  Irish stocks have the
highest P/E ratios and lowest dividend yields of all European countries on the
list. Some of this is a "denominator effect," of course.  Earnings fell
even faster than price, causing the Price/Earnings ratio to remain high even as
stocks sold off.  This was particularly true of the Irish banking sector, which
has losses big enough to skew the valuation of the entire Irish stock market. 
Still, Irish stocks as a whole are simply not cheap enough for me to be
interested. Source: Financial Times , November 26, 2010 But perhaps there are
individual bargains to be found?  Well, so I thought.  Alas, Ireland is a
small market and the pickings of Irish stocks that trade as ADRs in the United
States are rather slim.  Ireland's best blue-chip companies—such as
building materials producer CRH (NYSE: CRH ), food producer Kerry Group (PINK:
KRYAY ) and discount airline Ryanair (NASDAQ: RYAAY )—get most of their
revenues from outside of Ireland and have not sold off during the panic.  
Their share prices have remained remarkably resilient, and none trade at a
particularly attractive price.  The only American-traded Irish stocks that have
sold off are the banks—and I wouldn't touch them with a ten-foot pole right
now given the uncertainty facing them. For most Irish companies actually worth
owning, you're just not going to get that "blood in the streets" price
that I was hoping for. The Pain in Spain In the November issue of the Sizemore
Investment Letter I wrote, "Given the extreme bullish sentiment towards Asia
and Latin America and the lukewarm sentiment towards America and Europe, I think
it is highly likely that U.S. and European stocks are the surprise outperformers
over the next year." While Irish stocks as a whole are not as cheap as I would
like given the macro risk to the country, I am definitely seeing value elsewhere
in Europe.  Returning to the P/E ratio table I showed earlier, the only country
with "blood in the streets" pricing is Spain.  Part of this is legitimate
worry that Spain is simply too big to bail out like Greece or Ireland and that
the country is at high risk of defaulting on its debts. While I don't see
Spain defaulting, if it were to happen all Spanish stocks would at least
temporarily plunge in value, even rock-solid multinationals like Telefónica. 
The question becomes, "at current prices, are we being compensated for this
risk?"  And to this I give an emphatic "yes!" Telefónica is trading at a
P/E ratio of 7. Yes, 7.  This is one of the finest telecommunications companies
in the world, with a leading position in some of the fastest-growing emerging
markets in the world…and it's been effectively left for dead.   At current
prices, Telefónica would seem to be a "risk free" investment in the old
Graham and Dodd criteria.  Your risk of long-term or permanent impairment of
capital would be almost nil. The risk with Telefónica today is that it goes
from ridiculously cheap to even more ridiculously cheap due to a spate of
volatility in the Spanish market.   This is a risk that I am willing to take.
I want to strongly reiterate my "buy" recommendation in Telefónica. If you
haven't bought shares yet, this is a second opportunity.  And if you already
have, then this is a great opportunity to accumulate more shares. Charles Lewis
Sizemore, CFA, is Editor of the Sizemore Investment Letter .