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Hedge Funds Like These European Companies; Should You?

The US stock market has had a great run since 2009, but lately there have been many concerns voiced that the market is reaching overvalued territory and the bull run might end soon. Warnings regarding a bear market have been expressed in the past as well, but now we have more obvious signs. Since the beginning of 2018, US stocks have entered correction territory twice and the Dow Jones Industrial Average Index is 0.60% in the red year-to-date. S&P 500 is 0.50% in the green and the NASDAQ Composite has recently bounced back into positive territory helped by strong earnings that have been already reported and the prospect that the tech sector will show great results in the current earnings season. Overall, the expectations regarding the earnings season are positive and the main indexes are expected to gain ground in the next weeks.

When it comes to long-term prospects of the US stock market, there seems to be a consensus among analysts and smart money that the bull market still has a couple of years to run, although the returns won’t be as good as in the previous years. A strong US economy, the tax reform that allowed companies to repatriate overseas cash should help maintain momentum, even though the tariffs and potential trade war with China will put some downward pressure on US stocks.

However, there is another popular opinion that European market will remain bullish for longer. Europe started to implement measures after the crisis a year later than the US and saw years of sluggish growth as many countries were plagued by debt crises. It is estimated that recovery in Europe is around 1-2 years behind the US. In 2017, the European Union and the Eurozone saw an economic growth of 2.5%, which outperformed the US’s expansion of 2.3%. In December 2017, the unemployment rate in European Union was 7.3%, so it still has more room to fall. The improving economic outlook helped raise the euro to $1.23 from lows of $1.03 seen at the beginning of 2017. There are some concerns, such as the uncertainty surrounding Brexit and the potential raise to power of anti-euro parties in certain countries, but the overall outlook is positive.

Pixabay/Public Domain

Pixabay/Public Domain

In this way, European equities are positively viewed. For example, Invesco says that European valuation, while not cheap, are more attractive relative to the US. It points out that the forward P/E of the MSCI Europe Index stands at around 14.9, which is 20% higher than its 10-year average, but it represents a 20% discount to the US. In addition, European companies have more room to grow in terms of margins and European earnings are expected to grow in the high single digits this year.  Some US investors have said that they are looking closer at European equities. In November, billionaire Ken Fisher said that he is overweight to continental Europe and emerging markets. In an interview on CNBC, Themis Themistocleous, head of UBS’s European Investment Office, also said that in terms of asset allocation, they are overweight on European equities.

To sum up, European stocks look like a promising investment and retail investors should not overlook the signs. Retail investors can get access to European stock markets, but the process is more complicated than buying US stocks. Another way to get exposure to Europe is to invest in US-listed stocks of European companies. With this in mind, we have taken a look at the favorite European stocks among hedge funds and saw that most of them saw significant inflows of capital from smart money investors last year. Looking at the consensus hedge fund sentiment can be useful in identifying stocks that can help smaller investors beat the market, as our research shows. We have developed a strategy that takes into account the top consensus picks among the best-performing hedge funds and this approach showed returns of 74% since May 2014, outperforming the S&P 500 ETF (SPY) by over 20 percentage points. You can take a closer look at our strategy and access the latest picks by accessing our newsletters free of charge for 14 days.

On the next page, we are going to take a closer look at five European stocks that rank as the most popular among the funds in our database and which saw an increase in bullish sentiment over 2017. Also, we excluded companies that were only incorporated in Europe, but had their main offices in the US.

In BP plc (ADR) (NYSE:BP), there were 33 funds from our database holding shares heading into 2018, up by seven compared to the previous year, but this number inched down by one during the fourth quarter. Since the beginning of the year, BP plc (ADR) (NYSE:BP)’s stock is up by 3%. Recently, BP plc (ADR) (NYSE:BP) and Petrobras (NYSE:PBR) entered into a strategic alliance to explore potential business opportunities together. The company has also announced plans to keep carbon emissions flat to 2025 through focusing on more gas production and reducing methane leakeges. BP plc (ADR) (NYSE:BP) also said it will invest up to $500 million per year on renewable energy. As part of its green initiative, BP plc (ADR) (NYSE:BP) has teamed up with Tesla Inc. (NASDAQ:TSLA) to build its first battery storage project at one of its 13 wind farms in the US.

 

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There were 35 funds bullish on Constellium NV (NYSE:CSTM) at the end of last year, versus 28 funds at the end of 2016 and 36 funds at the end of the third quarter. Constellium NV (NYSE:CSTM) is a Netherlands-based global producer of aluminum semi-products. Recently, aluminum prices has reached a new seven-year high of over $2,500 per metric ton after the US introduced sanctions against Rusal, the largest aluminum producer in the world outside China. However, prices retreated slightly following speculations that the Russian government might nationalize Rusal, although it’s unclear how it would work and if it would help the company avoid sanctions, since aluminum buyers in Europe and USA might still be unwilling to work with a company controlled by the Kremlin. Over the past 12 months, Constellium NV (NYSE:CSTM)’s stock more than doubled on higher aluminum prices and improving fundamentals in the industry. However, the company still has to turn to profitability and to do that it has to focus on reducing costs and improving efficiency. Improving profitability should also help Constellium NV (NYSE:CSTM) with its debt ratings, which are currently in junk territory.

 

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Fiat Chrysler Automobiles NV (NYSE:FCAU) saw the number of investors long its stock increase by seven during the fourth quarter and by 12 over the last year to 36 funds that held shares at the end of 2017. For the last couple of years, Fiat Chrysler Automobiles NV (NYSE:FCAU)’s CEO Sergio Marchionne has been pushing for a consolidation in the automotive industry and tried to approach General Motors Co (NYSE:GM) regarding a potential merger. At the same time, Marchionne has been focusing on improving the company’s fundamentals and cleaning the portfolio. During his tenure at Fiat Chrysler Automobiles NV (NYSE:FCAU), Marchionne orchestrated the spin-off of trucks and tractor maker CNH Industrial (NYSE:CNHI) and supercar maker Ferrari NV (NYSE:RACE). Recently, Fiat Chrysler Automobiles NV (NYSE:FCAU) announced plans to separate auto parts business Magneti Marelli by the end of this year or in early 2019. Moreover, there are speculations that after Marchionne leaves Fiat Chrysler Automobiles NV (NYSE:FCAU) next year, the company will be open for a big merger, with Ford Motor Company (NYSE:F) and Volkswagen named among the potential buyers, but some Chinese automakers might also be interested.

 

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In Yandex NV (NASDAQ:YNDX), 44 investors disclosed long positions as of the end of 2017, down by one over the quarter, but up by 13 over the year. Yandex NV (NASDAQ:YNDX) is a major player on the Russian search market and enjoys a leading market share of 55%, even though it has to compete with Alphabet Inc. (NASDAQ:GOOGL)’s Google, which commands 42%. In addition, over the last couple of years, Yandex NV (NASDAQ:YNDX) has pursued new ventures, such as ride sharing, music streaming and payment services, as well as a voice-enabled digital assistant (called Alice) and a food delivery business. Yandex NV (NASDAQ:YNDX) has even developed a self-driving car that is currently being tested and has launched an e-commerce joint venture with Russia’s largest bank, Sberbank. Yandex NV (NASDAQ:YNDX)’s stock is trading at around 37.3 times forward earnings, which is higher than the market average, but it’s reasonable for a tech company.

 

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NXP Semiconductors NV (NASDAQ:NXPI) is the favorite European company among the investors we track, with the number of funds holding shares having grown by 11 to 92 over the fourth quarter and by 12 compared to the end of 2016. One of the reasons why NXP Semiconductors NV (NASDAQ:NXPI) is so popular among hedge funds is the fact that it is in the process of being acquired by Qualcomm Inc (NASDAQ:QCOM). The offer of $110 per share was made by Qualcomm Inc (NASDAQ:QCOM) in 2016, but NXP Semiconductors NV (NASDAQ:NXPI)’s stock traded below this level for the first half of 2016. In December 2017, activist investor Paul Singer’s Elliott Advisors said that it would oppose the deal and asked for the offer to be raised to $135. In February, Qualcomm sweetened the deal to $127.50 per share and the stock is still trading lower amid concerns that the deal might no get through as Chines regulators are looking for more concessions before approving the transaction. Even if the deal doesn’t go through, NXP Semiconductors NV (NASDAQ:NXPI) looks like an attractive stock that is trading at just 14.50 times forward earnings, well below the industry average.

 

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Disclosure: none

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