For some time, U.S. stocks have led the world. Not only in performance but also in representing more than half of the total market value of all listed world stocks.
But there are signs that this may be changing as international stock markets from Europe to Asia demonstrate some momentum and this highlights potential “catch-up” growth.
If you are looking to get ahead of the crowd, hedge risk, and seek less volatility, you should consider European stocks to diversify your portfolio.
European stocks are cheaper than U.S. equities but overall produce lower revenue and profit growth in part due to tech being a smaller proportion of the market. The stocks in the Stoxx Europe 600 are priced at about 14 times earnings, while the S&P 500 index is trading at roughly 25 times earnings.
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This is the biggest gap in two decades. There is plenty of room for catch-up as, since 2000, U.S. markets have posted a 256% increase, while the Stoxx Europe 600 has only risen by 42%.
European multinationals also provide investors with more international exposure since about 60% of European companies’ sales occur outside Europe, versus 30% for S&P 500 American companies, according to a study by Wellington Management.
High-quality European multinationals are a good place to start as they are widely recognized as being well-run and have tentacles spread throughout the world. Many of them make as much money in America as Europe, underlining the key truth that where a company operates and makes money is much more important than where it bases its headquarters.
Some of these European multinational stocks either trade on the NYSE or Nasdaq but many trade over the counter in a category I refer to as “pink-sheet blue chips.”
These European stocks can be largely divided into several groups.
4 Types of European Stock
The first group is the pharmaceutical giants like Novo Nordisk (NVO), Roche (RHHBY), Novartis (NVS), and GSK (GSK), all of which benefit from a healthcare spending boom to post impressive profits.
Another is the luxury goods brands such as LVMH (LVMUY) and L’Oreal (LRLCY). China has been the key driver to both companies, so this story is already starting to sputter as Chinese luxury spending is slowing down along with its overall economy. However, luxury spending is resilient globally and any pullback in these stocks is an opportunity to take a stake in a high-margin, persistent market.
Then there are the well-known consumer stocks such as Nestle (NSRGY) and Unilever (UL). These are conservative ways to tap into global consumer markets and earn some steady dividend income. These stocks tend to be less volatile but have a decided upward trend in stock price over time.
Next are tech companies such as ASML Holding (ASML) the strategically important semiconductor chip equipment business from Holland, and software company SAP SE (SAP) from Germany.
These are all quality stocks that would likely be in any European mutual fund, but of course, we want to do better than that.
Please consider becoming a member of the Cabot Explorer to learn which of our recommended European stocks is up 60% over the last year and which stock the Explorer plans to recommend in its next issue.
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