Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
Disclosure: Long EWP, TEF
The first time I set foot on Spanish soil was the spring of 2000, and what a fantastic time it was to visit. The dollar was near its all-time high versus the Euro, and an American could live like a king on a pauper’s budget.
My, how times have changed. I most recently visited Spain in the summer of 2009, and a cup of my beloved café con leche in Madrid’s Plaza Mayor had more than doubled in price when translated into dollars.
Of course, I gladly paid it. Even at an inflated price, there are few pleasures in life like enjoying a hot café con leche in a Madrid café.
Two years and a sovereign debt crisis later, prices in Madrid’s cafes are a little more reasonable. But prices in Madrid’s stock market are downright extraordinary.
Consider the broad Ibex 35 Index, which tracks Spain’s blue chip companies. At time of writing, it trades below the crisis levels of 2008; in fact, the index now sits at levels last seen in 2003.
The index sells for just 9.8 times earnings and yields and eye-popping 8.3 percent in dividends. Remarkably, this is even cheaper than Greece—despite the now almost certain ejection of Greece from the Euro zone and the havoc that that will wreak.
Value investors have a nasty habit of jumping into investments too early, and I am certainly no exception. I turned bullish on Spain in the first quarter, buying shares of the iShares MSCI Spain ETF (EWP) in my Tactical ETF model—and taking substantial losses for it in the months that followed.
Value investors also can tend to concentrate too heavily on the fundamentals and valuation of a company while ignoring the larger macro picture. More often than not, macro concerns prove to be noise. But during times of extreme stress, they have a way of overpowering company fundamentals. For example, Spanish telecom giant Telefonica’s (TEF) decision to reduce its 2012 dividend had more to do with conserving capital in a tight credit market than it did the company’s financial health.
Still, today most investors would appear to making the opposite mistake: focusing entirely on macro concerns while completely ignoring the incredible value in front of them.
I’ve recommended Telefonica in recent articles, and I’ll spare readers a lengthy rehash of my reasoning. I’ll reduce it to five words: big dividend, emerging market exposure.
The same reasoning applies to banking giant Banco Santander (STD), the largest bank in the Eurozone by market cap. Santander gets roughly half its profits from the emerging markets of Latin America and another quarter split between the United States and United Kingdom. Only 13 percent comes from the bank’s home market of Spain.
Santander trades for just 60 percent of book value and its dividend is over 13 percent at current prices. Could that dividend come under pressure in another wave of capital market volatility? Of course. But at current prices, I believe it is worth the risk.
Moving on, investors should consider electric utility Iberdrola SA (IBDRY). Like the other Spanish stocks mentioned, Iberdrola gets only about half of its revenues from Spain.
Roughly a quarter comes from Latin America, and the remainder comes from the United States, United Kingdom, and the rest of Europe. For a globally-diversified utility, Iberdrola is a steal. It trades for just 0.62 times its book value and 0.64 times sales, and yields 6.0%.
