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TheStreet Open House

Hedge Funds Have Confidence In 6 Rallying European Stocks

Mary-Lynn Cesar, Kapitall: Confidence in the EU is growing, as is GDP, so we looked for potential investment opportunities. 

Economic confidence in the EU rose for the fourth consecutive month in August, reaching a two-year high of 98.1 on the European Commission’s Economic Sentiment Indicator (ESI). Also in the midst of a four month growth streak, confidence in the euro area (monetary union of EU nations that use the euro) climbed by 2.7 points to 95.2 on the ESI, beating Businessweek’s reported expectations of a 93.8 reading.

[Read more from Kapitall: Online Gambling Stocks: Will the US Cash In? ]

The ESI measures manager and consumer confidence in the following sectors within the EU and euro area: construction, consumer, financial services (not included in the euro area ESI), industrial, retail trade, and service. In August, the EU reported improved economic sentiment in every sector, while the euro area experienced increased confidence in every sector but construction.

Within the euro area, fourteen of the seventeen countries experienced a growth in confidence, including the five largest economies: France (+1.6), Germany (+3.3), Italy (+2.0), the Netherlands (+5.2), and Spain (+0.8). The countries with weakening confidence were Finland (-3.0), Greece (-2.6), and Malta (-3.3); in the EU, that list also includes Latvia (-1.2) and Romania (-0.1).

Investing ideas

Earlier this month, the euro area reported 0.3% GDP growth in the second quarter of 2013, hopefully signifying the end of the region’s recession. The last time the euro area’s GDP grew was in the third quarter of 2011, when it posted 0.1% growth. The gradual improvement of the region’s economy and rising economic confidence inspired us to look for investment opportunities within the EU.

We began with a universe comprised of European stocks (specifically those belonging to the EU), which we then screened for bullish sentiment from institutional investors as reflected in significant net institutional purchases over the last quarter representing at least 5% of share float. These purchases indicate that institutional investors, such as hedge fund managers and mutual fund managers, expect these stocks to outperform into the future.

We wanted to find another indicator of upside potential, so we further narrowed down our list by screening for stocks that are rallying above their 20-day, 50-day, and 200-day moving averages (MA). This indicates that these stocks have strong upward momentum.

We were left with six European stocks on our list.

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