With the major U.S. stock indices hitting record highs, you may be asking yourself: Is it time to invest abroad? If you aren't, perhaps you should be looking at how to find the best European stocks to buy.
The U.S. stock market currently trades at about 20 times forward earnings. Compare this to the European stock market, which is trading at under 14 times forward earnings, and you can see just how overvalued the U.S. is on a relative basis.
"We've had unprecedented growth in the U.S. stock market due to the proliferation of new technologies, which the U.S. has benefitted from disproportionately," says Chris Berkel, investment adviser and president of AXIS Financial in Edmond, Oklahoma.
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But tides can change. You need only look as far back as the start of the century to see a time when the U.S. wasn't the hottest commodity on the global stock market stage.
"Think of the 'lost decade' between 2000 and 2008, when the S&P was flat," Berkel says. "During that time period, non-U.S. stocks essentially doubled, and headlines read, 'Is U.S. investing dead?'"
While U.S. investing is by no means dead, savvy investors know the key to successful long-term investing is diversification, diversification, diversification. And where better to look for that holy grail of investing than Europe?
"European stock markets are not all that different [from] their American counterparts, but they are sufficiently different to create alternative patterns, at least on a broad basis," says Angelo DeCandia, professor of business at Touro University, who specializes in finance. "And that's always the key to diversifying a portfolio."
How to find the best European stocks
The good news for U.S. investors is that the same rules apply to picking European stocks as they do when choosing the best stocks to buy here at home.
You want to find companies "with solid financials, strong management and (that) are competitive within their industries," says Derek Miser, investment adviser and CEO at Miser Wealth Partners in Knoxville, Tennessee. "Prior to investing, you should understand the market in which the company operates and review the stock's valuation and history."
The bad news is that gaining all of this information and insight may be easier said than done when investing abroad.
"Accessing data for the European market is not as immediate, especially for those investors who like to do a deep dive when performing their analytics," DeCandia says. "One solution could be to open an account with a European broker so that all the information we take for granted in the U.S. would then be available."
Of course, that information would probably be displayed in another currency – which points to a second challenge with investing abroad: Currency exchange rates.
"Fluctuations in the currency exchange rates can impact the return of European stocks when converted back to U.S. currency," Miser says.
Another factor to consider is the political landscape in which the company operates.
"Regulatory environments and economic policies can impact European stocks differently than U.S. stocks," Miser says. "The diverse political landscape in Europe can introduce an investor to unique risks they may not feel in the U.S."
The key to choosing European stocks to buy is doing homework – lots of homework. It may not be easy, but if you do it right, the long-term rewards should be worth the effort.
The best European stocks to buy
To give you a jump-start on researching European stocks for your portfolio, consider these three top contenders:
Unilever
Unilever (UL) is in the red on a year-over-year basis and comfortably below its Morningstar fair market value of $53.76, which creates a buying opportunity for the British consumer goods conglomerate, according to DeCandia.
He also notes that short interest on the stock is "practically non-existent, an indication that no one is betting against this well-established company."
Morningstar senior equity analyst Ioannis Pontikis gives Unilever a wide moat, indicating the company should be able to stay ahead of competitors for at least the next 20 years, and a low uncertainty rating thanks to its diverse portfolio of brands.
"You won't make a fortune with Unilever, but a timely addition to your portfolio will deliver a solid dividend and the potential for significant capital gains," DeCandia says.
Roche Holding
Another company with "maintainable competitive advantages," is Roche Holding (RHHBY), according to Morningstar strategist Karen Andersen.
"As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized and more cost-effective endeavor," she writes of the company.
Roche is trading at the low end of its 52-week range but with a forward price-to-earnings (P/E) ratio of less than 12, it's a better deal than many U.S. companies and its top competitors, Regeneron Pharmaceuticals (REGN) with a forward P/E of 21.7 and Merck & Co (MRK) with a P/E of 15. Roche is also priced well below Morningstar's fair market value of $55.
Morningstar gives Roche a wide moat as an industry leader in oncology therapeutics and in vitro diagnostics, alongside its "promising strategy of combining its expertise in both areas to generate a growing personalized medicine pipeline, making use of companion diagnostics," Andersen writes.
She does note potential environmental, social and governmental (ESG) risks related to U.S. drug policy reform, but says these risks aren't material to the company's valuation or moat rating.
Roche gets five out of five stars from Morningstar.
AstraZeneca
AstraZeneca (AZN) is a global pharmaceutical company focused on developing innovative new medicines.
"AstraZeneca's pipeline is emerging as one of the strongest in the drug group, and we think the company is developing several key products that hold blockbuster potential," writes Morningstar Sector Director Damien Conover. These include cancer drugs Tagrisso, Imfinzi, Lynparza, and Calquence, all of which carry "strong pricing power to support higher margin sales."
This pricing power should set AstraZeneca up for even better operating margins going forward, Conover writes. The company's "patents, economies of scale and powerful distribution network" give it a wide moat to protect its future market share from competitors.
The stock is currently trading at slight discount to Morningstar's fair market value of $78 per share.
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