How easily we’ve forgotten Europe. Last year, with a zooming U.S. stock market and Asia’s economic foibles on everyone’s mind, the lands of the Eiffel Tower and Buckingham Palace were little more than an afterthought for ‘Investors. But while many of us were preoccupied, Marcus Smith, a London-based analyst for the mutual fund company MFS Investment Management, had his eyes fixed on the Continent from Scandinavia down to the Rock of Gibraltar.
In a word, Smith’s assessment for 1998 is upbeat. “Right now, as opportunities go, Europe resembles the U.S. in the 1980s before a lot of the restructuring we saw in the States,” says Smith. “Not only are exports up in countries like France, Italy and Germany, but businesses are streamlining and reorganizing to get ready for the new European currency.”
As stock pickers go, Smith is something of a growth traditionalist. He chooses stocks that are raising earnings 12%-20% annually, provided their price-to-earnings ratio (P/E) isn’t 20%-30% above their growth rate. fie likes companies that have “franchise” value, particularly banks and pharmaceutical companies. “I look for unique products,” he says. “Commodity businesses like steel manufacturing always get hit when prices fluctuate. But a company with a strong brand name has more market control and a more faithful clientele.” And while Smith looks for companies that are increasing sales at 3%-5%, he admits to having a sweet tooth for restructuring stories. His reason breaks down to simple economics. Companies setting their houses in order often get hit by the stock market, allowing Smith to buy cheap. Then, when they get back on the fast track by boosting efficiency, their stocks rebound nicely.
Twenty-eight when he graduated with an M.B.A. from Wharton in 1994, Smith put in a year at MFS’s Boston headquarters before being whisked off to Europe. It was there that Smith found an interesting edge in working with European stocks. Often, a slight difference in accounting standards makes it hard for U.S. investors to get a grasp on a company’s books. The painstaking effort of converting foreign stats to comparable U.S. figures helps Smith find gems whose earnings growth is better than what first meets the eye.
One company Smith is high on is the Dutch banking and insurance firm ING Groep N.V. (NYSE: ING). Smith likes the management and thinks several strategic takeovers will keep earnings growth stoked at 15% a year. Convert Dutch accounting figures to American, and ING appears to be selling at a bargain-basement P/E of 13.5 times protected 1998 results, compared with U.S. insurers that now fetch a P/E of 14. Smith sees ING shares rising to the mid-$60s in 12-18 months.
Industrie Natuzzi Spa (NYSE: NTZ), an Italian maker of leather furniture, is another Smith favorite. Natuzzi pieces are commissioned. by many large U.S. department store chains, such as Dayton Hudson and Macy’s. Smith says Natuzzi furniture is so popular, the company had an order backlog of 20 weeks last fall. Although Natuzzi had to pay a lot of overtime to catch up, the company