3 Ways to Play the Coming European Rebound

Walk around virtually any city in Europe, and you'll get a glimpse of deep economic strains.

 

Many store fronts are boarding up, people are walking the streets with hopes of finding employment and landlords are evicting tenants who are far behind in rent.

Yet, economists increasingly expect the gloom to lift slowly. And if history is any guide, then you want to invest in troubled Europe before the region's economy is back in full force.

This notion hasn't been lost on some investors who are already profiting from increased exposure to Europe. But these investors were mostly focused on the riskiest stocks that appeared to be the most distressed. Many Italian bank stocks, for example, have risen 50% or even 100% since bottoming out last summer.

But for investors looking to commit fresh funds to European investments, it may be wiser to take a different tack.
Focus on stocks and funds that remain near lows, but have a high degree of economic sensitivity. Once investors have become convinced that Europe will indeed exit a recession in coming quarters, then it's the deeply-cyclical (often industrial) stocks that will likely greatly benefit.

Here are three examples...

ArcelorMittal (NYSE: MT)   This Luxembourg-based steel maker derives more than half of its sales from Europe. The deep recession has dealt a double-barreled blow to the company as European auto sales plunge to new depths and commercial building construction grinds to a halt. These two industries are huge consumers of steel.   From a peak of $117 billion in sales in 2008, sales are expected to come in at just $84 billion in 2012. Analysts expect only modest improvements, perhaps to $86.5 billion in sales in 2013. Yet, the tepid top line masks a vastly streamlined cost structure that should start to bear fruit this year.    ArcelorMittal generated a $3 billion free cash flow loss in 2011, and likely a small free cash flow loss in 2012 as well. But analysts at Merrill Lynch say that recent cost cuts and constrained capital spending should enable free cash flow to rebound to $2 billion this year, and perhaps $4 billion in 2014. By the time the European economy is back on its feet in subsequent years, free cash flow could really take off. After all, the company averaged $7.8 billion in annual free cash flow in 2007 and 2008, the last time the cycle was at its peak. (more)

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