7 Undervalued European Stocks To Diversify Your Portfolio During Debt Talks

James Dennin, Kapitall: With uncertainty in the US, investors may look abroad. We found seven undervalued European stocks to consider.

The US debt ceiling debate rages on and while many analysts seem to agree that a deal will be reached, it's also safe to say people are considering other markets as safer bets for their money.

[Read more on Europe from Kapitall: 3 Profitable European Stocks Amidst Mixed Messages from the Continent]

For one, there's China. After a long appeal, the Chinese government has succeeded in lobbying the British government to roll back regulations on the use of Chinese currency in England. The result is that London's stock exchanges will become the Western center for trading Chinese stocks. Not US exchanges.

Which does not necessarily bode well for New York's bid to get the highly lucrative, much anticipated Alibaba IPO. With regulations rolled back, British investors can apply for licenses to trade Chinese currency directly, and China would move operations of its three biggest banks to London, from Luxembourg.

While the United Kingdom was already the biggest center of overseas trading for China, at about 5 trillion RMB per day, the move will make it easier for Chinese banks to secure financing in the west, and give British banks valuable inroads. 

Now, this doesn't necessary mean the relevance of the US markets is declining, simply because of prolonged budget negotiations.

The government shut down often -  eight times in fact - when Ronald Reagan and Tip O'Neill were in charge of the executive and legislative branches respectively. While these shutdowns were smaller, and didn't follow a US credit downgrade, there is a strong argument to be made that the media is exacerbating the situation.

Investing ideas

That being said, there are some investors who might be interested in moving their money away from American companies until a compromise is reached. While US stocks in general are up as of this morning, and have performed fairly well over the week, a lot of that has to do with Janet Yellen's appointment to the Fed.

She is unlikely to end tapering, and quantitative easing is generally very good for the stock market.

But for those investors looking to hedge their risk against the ramifications of further political squabbles, consider Europe, where the re-election of Angela Merkel, a buoyant French stock market, and even the possibility of a Greek turnaround are improving sentiment.

We ran a screen to find undervalued European stocks trading on US exchanges by looking at the levered-free cash flow to enterprise value ratio (LFCF/EV).

The LFCF/EV ratio is essentially a ratio of the cash a company has on hand to an alternative measure of its size – the enterprise value. Enterprise value is similar to market capitalization, except it also takes into account a company's debt and liabilities.

Levered-free cash flow is the amount of money a business has on hand to pay dividends to grow the company. When this ratio is high, in this case above 10%, it means that a company is liquid relative to its size. Which means the stock might be undervalued. 

We were left with seven undervalued stocks on our list.

Click on the interactive chart below to see data over time. 

Do you see investment opportunities in European-based stocks? Use the list below as a starting point for your own analysis. 

1. ACE Limited ( ACE): Provides a range of insurance and reinsurance products to insureds worldwide. Market cap at $32.23B, most recent closing price at $94.50.

Levered free cash flow at $3.96B vs. enterprise value at $36.66B (implies a LFCF/EV ratio at 10.8%).  
 

 

2. Etablissements Delhaize Freres et Cie Le Lion S.A. ( DEG): Operates food supermarkets in North America, Europe, and southeast Asia. Market cap at $6.06B, most recent closing price at $60.0.

Levered free cash flow at $978.31M vs. enterprise value at $9.00B (implies a LFCF/EV ratio at 10.87%).
 

 

3. Eni SpA ( E): Engages in the exploration, production, transportation, transformation, and marketing of oil and natural gas. Market cap at $86.44B, most recent closing price at $47.72.

Levered free cash flow at $20.92B vs. enterprise value at $105.01B (implies a LFCF/EV ratio at 19.92%).
 

 

4. Nokia Corporation ( NOK): Provides Internet and digital mapping and navigation services worldwide. Market cap at $24.57B, most recent closing price at $6.62.

Levered free cash flow at $2.01B vs. enterprise value at $19.05B (implies a LFCF/EV ratio at 10.55%).
 

 

5. Star Bulk Carriers Corp. ( SBLK): Operates as a shipping company providing seaborne transportation solutions in the dry bulk sector worldwide. Market cap at $45.41M, most recent closing price at $8.30.

Levered free cash flow at $23.37M vs. enterprise value at $233.23M (implies a LFCF/EV ratio at 10.02%).

 

 

6. XL Group plc ( XL): Provides insurance and reinsurance coverages to industrial, commercial, and professional firms, insurance companies, and other enterprises worldwide. Market cap at $9.11B, most recent closing price at $31.45.

Levered free cash flow at $1.10B vs. enterprise value at $7.89B (implies a LFCF/EV ratio at 13.94%).
 

 

7. Xyratex Ltd. ( XRTX): Provides modular enterprise-class data storage solutions and storage process technology. Market cap at $309.75M, most recent closing price at $11.24.

Levered free cash flow at $39.80M vs. enterprise value at $225.99M (implies a LFCF/EV ratio at 17.61%).

 

 

( List compiled by James Dennin, a Kapitall Writer. Analyst ratings sourced from Zacks Investment Research. LFCF/EV data sourced from Google Finance. All other data sourced from Finviz.)

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