Bullish on Europe

MSF's Marcus Smith seeks big gains with foreign shares

Even though emerging markets have been ravaged over the past 18 months, Europe has been a bright spot on the international scene. Last December’s interest rate cut by the European Monetary Union and corporate restructuring continue to bode well for investors. Moreover, you can find prime stocks at bargain prices. Equities on the MSCI Europe Index trade at 21 times trailing earnings vs. 26 times for the S&P 500. (See “Growing Global,” this issue.)

Marcus Smith keeps his sights fixed on the Continent, from Scandinavia down to the Rock of Gibraltar. The London-based analyst for the mutual fund company MFS Investment Management offered five international picks last year. Two met his expectations: Allied Irish Banks PLC (NYSE: AIB) and Telecom Italia SPA (NYSE: TI). One, ING Groep NV ADS (NYSE: ING), has yet to fully realize its potential. And two-Portugal Telecom SA (NYSE: PT) and Industrie Natuzzi SPA (NYSE: NTZ)-fell short.

Allied Irish Banks, Ireland’s largest bank, benefited from that economy’s 10% annual growth rate as well as a key acquisition in the U.S. market. As of early February, Allied traded at $104.19, compared with its $75.75 price when Smith recommended it a year ago-an impressive 37.5% return for the year.

Telecom Italia, which controls the world’s largest cellular franchise, saw that aspect of its business grow over 100% in the past three years. As of February, shares traded at $108.25 vs. $68.56 a year ago, a return of 57.9%.

Shares of ING Groep grew from $52.13 to $55.50, an unimpressive share price growth of 6.5%. He’s still bullish on the Dutch banking and insurance firm “because of its earnings potential, which is [now] 12% instead of 15%.”

A growing demand for telecommunications services helped Portugal Telecom grow earnings 25% last year. When the company acquired a Brazilian-based cellular phone company, institutional investors viewed the stock as a Latin American buy. When that stock market tanked, Portugal Telecom went with it.

Industrie Natuzzi, the world’s leader in designing and selling contemporary leather furniture, dropped to $19.13 a share from $25.06 a share when Smith recommended it. He maintains that “the stock is cheap right now but is sure to bounce back.”

How to buy on margin
If you think the stock market will continue to bear fruit, you may be able to reap a bountiful harvest by buying equities on margin. But be careful. “Using margin to invest will raise your returns if stocks go up,” says Tim O’Leary, a senior vice president at Waterhouse Securities, a New York-based discount broker, “but you’ll also lose more if stocks fall.”
Margin investors use money that’s borrowed from their broker and pay interest rates pegged to the broker’s “call rate,” which can be found in daily newspapers. Last February, for instance, that rate was 6.5%. Most brokers charge investors between 0.5% to 2% above the rate, which means that the interest you pay on margin loans will usually be in the 7%-8.5% range. The lowest rates are reserved for accounts over $50,000.

Such loans are backed by securities held in your

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