Europe, not the US, is the place to look for value stocks

Europe has a far bigger pool of stocks that are currently trading on attractive multiples than the US.

The message from this week’s Chart Room is simple. If you’re looking for value stocks, Europe is a much better hunting ground right now than the US.



The rise of the ‘Magnificent Seven’ in the US has created something of a slipstream effect that has dragged along many of the 493 other (less magnificent) stocks in the S&P 500 and pumped up their valuations. Europe has its own version of the Magnificent Seven, dubbed the ‘Seven Wonders’, comprising Hermès, Novo Nordisk, Siemens, LVMH, SAP, ASML and Schneider Electric. But while those seven have, like their US counterparts, outperformed the broader market, their success has not rubbed off on other stocks to anything like the same extent.

The result is the S&P 500 has far more stocks on a price-to-earnings (PE) ratio above 30 than the MSCI Europe index. By contrast, the latter has a much bigger pool of stocks with PE ratios lower than 10.

Of course, trading on a low PE ratio does not necessarily mean a stock is good value. Earnings could be cyclically overinflated, cash conversion might be poor, the balance sheet could be a mess. But with nearly 200 companies trading on less than 15 times earnings you can find a healthy number that are not only cheap but have good fundamentals. They also look well positioned for a period in which monetary policy is expected to remain relatively tight.

These include the cheaper consumer cyclicals, which directly benefit from rising wages, as do some consumer staples in the defensive space. Several financial names also look cheap and should maintain their profitability as long as interest rates don’t fall. There are also a few tech stocks that are starting to see accelerating earnings-per-share growth and which are still on reasonable valuations.

It may feel nice to own stocks that all the influencers herald as ‘magnificent’ or ‘wonderful’. The real gems though are found elsewhere.