An Ideal Contrarian Investment

Nearly five years ago, I was at the Il Pillicano boutique resort on the coast of Italy.  My newly-wed wife, Carrie, and I were in Italy for our honeymoon at one of our last stops before returning home.
While I was trying to enjoy this special time with my wife, the world around me was falling apart. Financial markets had been reeling after Lehman Brothers had failed in September.  Like nearly every investor, my investment portfolio was failing and my business was falling apart.
I distinctly remember pacing on the balcony of our suite, talking on the phone with my investment colleagues and leadership team at the office in Washington, D.C. We were trying to do the impossible – to “plan” our way out of the crisis.
At the time, the Italians I met asked how America could have gotten into such financial trouble. They thought most Americans were stupid for buying houses they couldn’t afford. And that U.S. banks like Lehman Brothers were greed-driven corporations that deserved to fail.
Fast forward to today, and the U.S. has made considerable progress recovering from the housing bubble and credit crisis. Instead, it’s been Europe’s sovereign debt crisis that has captured headlines for the last several years. And this was especially true in Italy and the other PIIGS – Portugal, Greece, and Spain.
The mountains of sovereign debt among European countries prompted a series of bailouts and held stock markets around the world hostage as the carnage unfolded. It seemed a recovery in Europe might take decades.
After several years of bailouts, budget cuts, and threats to disband the European Union, the region is finally turning a corner. And the future looks much brighter than the past few years.
Gross domestic product in the 27-nation European Union grew 0.4% in the second quarter. That may seem small, but it’s the first time the region has had positive growth since late 2011. Meanwhile, the 17-nation euro zone is projected to expand by 1.2% in 2014.
Signs of progress are popping up across the region. After years of economic decline, Ireland, Italy, Portugal and Spain – basically a who’s who of worst euro-zone debt offenders (in addition to Greece and Cyprus) – are all projected to grow in 2014. Ireland, in fact, is on track for a second straight year of growth.
The better economy is helping consumer confidence. Retail sales in the United Kingdom improved 0.9% in the second quarter. The euro zone’s purchasing managers’ index just posted its highest reading in 16 months. And interest rates have fallen to the 4% range in Ireland, Italy and Spain after topping 7% little more than a year ago.
All those numbers suggest that Europe’s worst days in the past. It will take years for the continent to fully regain its footing in the wake of its worst economic crisis since the 1920s. But it seems Europe has finally hit rock bottom and is on the rebound.
As the region begins to dig itself out from its longest recession on record, buying opportunities abound. European stocks are cheap right now, trading at just 12.5 times projected earnings. That’s an 18% discount to the valuation of America’s largest companies.
One sector of the European economy has been beaten up during the downturn. Stocks in this crucial industry have fallen an average of 36%.  Not only that – but some of the best companies trade at just 10x earnings.  And that makes this sector particularly undervalued.
With Europe finally emerging from recession, one sector stands to benefit most of all. It will be at the forefront of Europe’s recovery. Given its dirt-cheap valuation and the potential for growth in the coming years, I believe this particular sector is one of the best value investments in the world today.
Since U.S. stocks are relatively fairly priced, Europe is offering some great values. I’ve decided to add exposure to this beaten-down European sector in my $100k Portfolio. Next week, I will reveal my pick in the September issue of my service. If you’re not a $100k Portfolio subscriber and you’d like to get my latest issue, just click here.
In the meantime, keep an eye on stocks across the pond. Europe’s debt struggles have been long and painful, but it appears the continent has finally turned the corner toward recovery. Let’s be sure to get in at the beginning of that recovery.

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