| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
How to Surf the Continent The tech wave should continue to rise next year A long, hard decade of corporate restructuring and policy reform is starting to pay off in Europe. Economists forecast growth of about 3% next year, and analysts say corporate profits should jump 16%, compared with growth of 3.6% in the U.S. and a 17% gain in profits. ''Europe has tailwind,'' says Michael Levy, managing director at New York's Deutsche Asset Management, which manages $6.3 billion of funds. Europe's economy is not just gathering force; it's fundamentally changing. Productivity is up, inflation is down, and a high-tech information economy is emerging. ''Europe is going to go through the same thing the U.S. did,'' says Richard Davidson, European equities strategist at Morgan Stanley Dean Witter in London. That includes the mania for all tech-related investments. CELL MANIA. You can see it already. European technology shares have soared 146% this year. Britain's Freeserve went public at $2.40 in July, and shares are now up 200%. Increasingly frenetic merger and acquisition activity, especially in the telecom sector, has also pushed valuations sky-high. But it's not too late to invest. Most experts believe the market could still rise another 10% to 15% next year. The big winners are likely to be technology, telecom, media, and banking stocks, say investment pros. Above all, they look to a group of globally competitive companies that have grabbed the lead in wireless communications. Finnish mobile-phone maker Nokia (NOK) remains a darling of stockpickers, despite recent gains. Its shares have soared by 170% this year--and have doubled in just the past eight weeks. Nokia's price-earnings ratio on expected 2000 earnings is a lofty 76 (table, page 116). But analysts say the $20 billion market leader is well positioned to capitalize on the next generation of wireless technology, which will bring data transmission to phones and other small mobile devices. ''The next revolution is the Internet going wireless,'' says Michael C. Kraland, president of Trinity Capital Partners in Paris. ''And Nokia stands to make more on that than anyone else.'' Goldman, Sachs & Co. forecasts a 33% revenue rise in 2000 and a net profit gain of 23%. Swedish telecom-equipment maker Ericsson (ERICY) is another firm favorite. Admittedly, delays in launches of its cell-phone products were a problem this year, but the company has new top management. Ericsson, which has a prospective price-earnings ratio of 53, has just signed a deal with Microsoft Corp. (MSFT) to develop Net-based applications for a new generation of cell phones. Ericsson generates 80% of its revenues from cellular networks and is a global market leader in wireless infrastructure. A third-generation of wireless technology is near release, which means mobile operators will have to invest heavily in new equipment. ''The potential growth rates [for companies such as Nokia and Ericsson] are so great that the valuation is justified,'' says Mike Hughes, director at Baring Asset Management in London. Another way into Europe's New Economy is to nab stocks of the companies that make the chips that power cell phones. Franco-Italian chipmaker ST Microelectronics (STM), Britain's Dialog Semiconductor and ARM Holdings (ARMHY) are all good bets. A related play: Munich-based Epcos (EPC), a Siemens spin-off that makes components for mobile phones. ''A lot of bigger companies are spinning off portions of high-tech businesses to get proper valuations for them and use that currency for strategic investments,'' says Loretta Morris, partner at Nicolas Applegate Capital Management in San Diego. Of course, conventional telecom companies of all sizes--from former monopolies to scrappy upstarts--remain a good choice, too, say analysts. Most data transmission depends on existing infrastructure, and many telecom operators have their own mobile and Internet businesses. The best of what's available includes British Telecommunications (BTY), Dutch operator Libertel, and France's Alcatel. Europe's software and information-technology services will benefit from increased corporate spending on technology and an accelerated drive to outsource key services. Goldman Sachs analyst Charles Elliott likes France's Business Objects, which makes software tools for managing data, and Exact Holdings, a Dutch company whose products automate business processes. Exact's software is cheaper and easier to install than that of its main competitor, German software giant SAP (SAP), Elliott points out. He expects Exact to do well by selling to small and medium-size companies; he forecasts annual revenue growth of 30% from 1999 to 2001. But you shouldn't overlook SAP, either, argues Frederic Leguay, senior portfolio manager for European equities at AXA Investment managers in Paris. SAP, which stumbled in adapting to the Net, will bounce back and leverage its huge customer base, he says. A hidden gem in the tech sector: the Netherlands' Landis Group, Europe's No. 1 network vendor. It sells Cisco's (CSCO) network systems and is growing at 50% to 60% annually. The stock has doubled since mid-October, to about $46. ''My target is $60,'' says Kraland of Trinity Capital Partners. If the relatively high prices of some technology stocks put you off, market pros suggest trying sectors such as advertising and media. Such stocks benefit from the Internet revolution as fledgling companies, flush with cash, spend millions of advertising dollars to grab attention. Among the top picks: Britain's WPP Group, French media companies Canal Plus (CNPLY) and TF1, and Paris-based advertisers Havas and Publicis. The Net revolution could steal business from Europe's slow-moving financial institutions. But most analysts say the strong economic growth expected next year bodes well for most--as do planned cost-cutting and anticipated consolidations. AXA's Leguay likes the aggressive Banco Santander Central Hispano, one of Spain's dominant banking groups. He also recommends Italy's San Paolo-IMI because it's likely to grow its base of mutual-fund investors. ELF CONFIDENCE. Mergers and acquisitions will continue to drive change next year. M&A activity clocked in at $1.3 trillion in the 11 months through November--surpassing the U.S. for the first time. Germany, Spain, and Switzerland are likely to see the biggest moves in 2000, says Mark Howdle, head of European equity strategy at Salomon Smith Barney in London. Analysts say targets could include Dutch bank ABN-Amro (AAN), Germany's Commerzbank, and Dresdner Bank. Among pharmaceuticals, market watchers say Swiss giants Roche (ROHHY) and Novartis (NVTSY), which could link up over the next 12 months, are both interesting investments. As strong growth kicks in, consider adding some good cyclical stocks--but only those that are undervalued or will benefit from restructuring. German chemical giant BASF (BASFY), Saint Gobain, the French high-tech glass maker, and British conglomerate Invensys top most lists. Deutsche's Levy favors French oil giant Total-Elf and retailer Carrefour. Alain Bokobza, head of European equities for Societe Generale, also likes oil major Total-Elf because it is heavily undervalued. You can't say that about many tech companies. But you don't have to choose between them. For now, a mix of solid values and riskier bets looks likely to produce the best results in 2000. By GAIL EDMONDSON With David Fairlamb in Frankfurt and Sharon Reier in Paris _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS How to Surf the Continent TABLE: Europe's Hot Picks Best Bet: Go Mobile For the Record: Gary Lowe INTERACT E-Mail to Business Week Online | |||
