3 European stocks with recovery potential
David Herro, American businessman and CIO of Harris Associates, shares with CNBC some of his European picks he expects will recover in the coming period. Two of these three stocks are banks and Herro explains why European banks are currently interesting.
Herro has a longstanding position in Credit Suisse and BNP Paribas. Then isn’t he worried about the banking sector? “The concerns about banks are twofold,” Herro says. “Firstly, the effect of low or even negative interest rates on profits, and secondly, the capital position of banks.”
“And these fears are certainly justified. But if you look at the prices you pay, and if you look at other factors, beyond the low interest rates which affect earnings growth, you see they are quite positive. You pay a much lower price for companies that are actually quite safe.”
“These are important reasons why we are exposed to banks: a low price and improving fundamentals.”
The other tip by Herro is a share from the automotive industry: Daimler. “This car and truck manufacturer is a good example of a restoration candidate in the European industry. It is traded at a normal price / earnings ratio of about 7, has a 6% dividend yield, while the pay-out ratio (the percentage of earnings paid out in dividends) is not even 50%.”
“Yes, the truck market is a tricky business, that’s right. But they continue to succeed in reducing costs, thereby increasing margins. And in the luxury segment of passenger cars Mercedes remains strongly positioned: they are gaining market share in China and compared to peers, they also perform well in the US and Europe. In my opinion this is a really nice share, which deserves a place in a European equity portfolio.”