Watching the U.S. Men’s National team compete – and perform quite admirably – in this first-ever November/December World Cup was an edge-of-your-seat thrill ride. But like most World Cups in my lifetime, it ended with the U.S. bowing out in the Round of 16 against a savvier, more skilled European side. America has made significant strides in soccer over the past three decades, but it still isn’t quite at the level of the likes of the Netherlands, France, Spain or England. In the investing world, the inverse is true: U.S. stocks typically outperform European stocks, at least in recent decades. This year, that flipped, however.
The EURO STOXX 50 Index, composed of 50 stocks from 11 countries in the Eurozone, is down 7.9% this year, well shy of the losses in the S&P 500 (-16%) and the Nasdaq (-28%), albeit a tad steeper than the 7.1% decline in the Dow. The FTSE 100, London’s benchmark stock market index, is actually up 2.1% in 2022. So are Portugal’s (+5.3%), Greece’s (+1.1%) and Bosnia and Herzegovina’s (+7.1%) stock markets.
Why the (relative) strength across the Atlantic?
It’s not due to lower inflation. Europe’s average inflation rate is 10%, higher than America’s current 7.7% rate.
It’s not due to higher GDP growth. The U.S. economy expanded by 2.6% in the third quarter. No major European nation grew by even 1%, and a couple of big names (England, the Netherlands) contracted slightly.
The difference can be seen in the aggressiveness of their central banks. Interest rates aren’t accelerating in Europe at the same speed that they are in the U.S. America’s federal funds rate is up to a range of 3.75% to 4%, with another 50-basis-point hike almost surely on tap next week. The average interest rate across Europe is a mere 2%.
Meanwhile, European stocks didn’t explode the way U.S. stocks did in the 20 months that followed the March 2020 Covid crash. During that time, the S&P 500 more than doubled. The EURO Stoxx 50 was up 77% during that time, while the London Stock Exchange gained only 39%. Thus, European valuations weren’t as sky-high entering 2022.
The combination of less aggressive central banks and more muted valuations has made 2022 far less catastrophic for European markets; in some cases, it’s actually been a decent year. And plenty of European stocks have momentum headed into 2023.
Here are three that stand out.
European Stock #1: Equinor ASA (EQNR)
Equinor ASA (EQNR), formerly Statoil ASA (STO), is an integrated energy company operating in more than 30 countries and based in Norway, where the government is a majority owner. The company changed its name in 2018 as it seeks to broaden its focus to include new energy solutions – primarily wind – and attract young talent.
Like all energy companies, Equinor took a big hit in 2020 thanks to Covid; revenues declined 28% for the year, and the company failed to turn a profit for the first time since 2016. It’s made up for lost time ever since: In 2021, revenues nearly doubled to $88 billion, Equinor’s best sales year since 2014; this year, analysts expect revenues to increase another 55%, to new highs above $135 billion. Next year, the top line is expected to rise another 28%, to $174 billion.
Equinor’s recovery has gotten a major boost from its efforts to beef up its renewable energy wing, including acquiring a 45% stake in Noriker Power Limited, a U.K. battery-storage developer.
All that growth has been great for EQNR shares, which are up 38% year to date. The stock hasn’t moved much in the last few months, but it’s still comfortably above its 50- and 200-day moving averages. It’s very buyable right here.
European Stock #2: AstraZeneca (AZN)
AstraZeneca (AZN) is the forgotten Covid-19 vaccine developer. The U.K.-based biotech essentially finished fourth in a three-horse race, behind Moderna, Pfizer/BioNTech, and Johnson & Johnson, to bring the jab to America. So, its share never quite took off the way BioNTech’s or Moderna’s did. Now, it’s faring much better than both, thanks in large part to its vast array of cancer medicines.
Those include Tagrisso, Imfinzi and Enhertu, which helped the company’s oncology portfolio grow sales by 24% in the most recent quarter. Meanwhile, the company hasn’t gotten out of the Covid game; sales of its Evusheld Covid therapy drug have steadily grown. All told, AstraZeneca is on track to grow revenues by 19.4% this year and earnings per share by 26%. More growth (5.1% revenues, 3.9% EPS) is expected in 2023. All that growth has led to a 16.7% bump in AZN’s share price this year, all of which has come in the last two months. Sprinkle in the 2.1% dividend yield, and there’s a lot to like here.
European Stock #3: Shell plc (SHEL)
Shell plc (SHEL) is a more familiar name, the British-Dutch energy company that’s headquartered in the Netherlands. Like Equinor, it has rebounded strongly along with the rest of the global oil industry, with revenues growing 44% in 2021, a year after falling 47%, in 2020. Things have gotten even better this year, with revenues on track for 48.6% growth and earnings per share expected to more than double.
As for SHEL stock (formerly RDS), it surged with most oil stocks this year, rising 32%, with strong momentum in the last two-plus months. Shares are still shy of their June highs (61) and trade at a mere 5 times forward earnings estimates. Buy on dips.
Those are our favorite European stocks at the moment. However, there are plenty of other stocks outside U.S. markets that we like right now. If you want to learn some of their names, take out a subscription to our Cabot Explorer advisory, where Chief Analyst Carl Delfeld scours the globe for the best investment opportunities that few Americans know about.
If that sounds right up your alley, click here.