Find investment opportunities in Europe

Two years ago, Europe was on the brink. Publications like Time and The Economist ran apocalyptic stories on the region’s impending doom. Conditions were so dire that throughout much of 2011 and 2012, oddsmakers put the likelihood of a Eurozone breakup at more than 50%.

Yet, European countries have managed to restore export competitiveness, jumpstart economic growth and right-size fiscal balances despite inherent policy constraints.

In fact, the IMF predicts the Eurozone as a whole will be running a surplus roughly as big as China’s (as a share of GDP) for at least a few years. In this improved environment, consumer confidence recently reached its highest level since 2007.

Deflationary pressures persist and significant risks remain, but crisis-era hysteria has faded, at least for now. Had Mario Draghi described the Eurozone as an “island of stability” two years ago, he would have been laughed out of Frankfurt; when he did so in March, the assessment was largely accepted.

While this is great news for most, it does imply fewer opportunities for value investors — people who invest in companies they feel are undervalued by the market. The low point of the European debt crisis was a great opportunity for value investors to increase weightings in fundamentally sound companies trading at record discounts. Of course, a Eurozone breakup would have likely turned many of these value stocks into value traps.

Opportunities still exist

But opportunities to invest in European stocks haven’t dried up. On the contrary, valuations among diversified multinationals domiciled in Europe remain historically attractive, and still-depressed profit margins and earnings offer significant recovery potential over the long term.

A good example is BNP Paribas, France’s largest lender. It’s maintained double-digit returns on tangible equity and a payout ratio of around 30% during one of the most volatile periods in the history of European banking. Even after doubling in the last two years, BNP continues to trade below tangible book value, a discount that seems completely unwarranted for a well-capitalized, highly profitable bank.

Another example is retailer Kingfisher. With the U.K. housing market in the doldrums, Kingfisher focused on things it could control. It cut costs, optimized its supply chain, developed a multi-channel sales platform, and strengthened its balance sheet. The company has made acquisitions across Europe and emerging markets, and hasn’t hesitated to return cash to shareholders when prudent. All of this has put Kingfisher in a good position to benefit from the upturn in European housing.

The European energy sector offers less mature bargains with attractive potential long-term upside. Negative sentiment has recently made well-positioned oilfield services firms like Holland’s Fugro and France’s Technip more attractive, since they’re trading at roughly 30% discounts to their long-term forward price-to-equity multiples.

From a bottom-up perspective, Europe has been the greatest value source of any major region over the last couple years. Still earlier in its cycle than the U.S. or Japan, Europe remains the world’s most attractive bargain-hunting ground for disciplined value investors with a long-term horizon.

Lisa Myers is a portfolio manager at Franklin Templeton Investments. The views expressed in this article do not necessarily reflect those of Franklin Templeton Investments.