Italy Favors The Really Bold

By Aaron Levitt | March 27, 2012 AAA

Being a contrarian investor is going against the herd. Buying what the market hates over the long-term can prove to be a very fruitful proposition. Perhaps no segment of the market is more hated than stocks located within the so-called PIIG's nations of Europe. After all, their enormous debt loads are one of the main reasons for stalling global growth. Riots, austerity measures and possible defaults are still a real threat plaguing the eurozone, and these worries do have the capability to unhinge the already fragile European recovery. It's no wonder why many investors are steering clear of the continent altogether by avoiding funds like the iShares MSCI EMU Index (ARCA:EZU). However, the region is home to some of the largest multinational corporations and for those investors looking for global values, one PIIG stock could be a great contrarian buy.
Values in Italy
Given the nation's various structural issues, Italy currently ranks extremely low on investors' priority lists. There is certainly some justification for ignoring the nation. Italy's public debt is one of the highest in the world. Currently, this debt sits at nearly 120% of gross domestic product (GDP). Analysts at Lombard Street Research (LSR) in London, estimate that by the end of 2013, that level will reach 140% of GDP. Like Greece, a partial default on its debts is still a high possibility for the Mediterranean nation. Add this to the nation's aging population and political ineptness and there isn't too much to get excited about.

However, things may be finally moving in the right direction for Italy. First, the exit of Prime Minister Silvio Berlusconi at the end of 2011 has ushered in a new level of political competence for the nation. Under new Prime Minister Mario Monti, various reforms have been taking place. So far, the age at which public pensions can be taken has been raised and the way these pensions are adjusted for inflation has changed. In addition, real estate values are being reevaluated for tax purposes. This should boost revenues for the nation. Perhaps, more importantly, these reforms have generally been accepted by the Italian people. Unlike Greece, who has seen rioting in the face of austerity measures, Italy has seen very few protests. Combine this with the regions low unemployment rate, relative to the rest of PIIG's, and there's reason to believe that real change has come to Italy.

Despite these positives and changing positions, stocks within the country still trade at a discount compared to Europe proper. As one of the "Old World" economies in Europe, Italy offers a variety of multinational exporters. Many of which have made significant inroads into faster growing emerging markets. Italy also features a high internal savings rate and most of its debt is locally owned. This gives the Italian government more flexibility in dealing with that problem as opposed to Greece or Ireland.

Betting on an Italian Renaissance
While going "whole hog" into the nation might not make sense, as a small satellite play, Italy certainly has value. The easiest way to add exposure is through the iShares MSCI Italy Index (ARCA:EWI). The exchange-traded fund (ETF) tracks 30 different Italian firms including car maker Fiat (OTCBB:FIATY) and utility Enel (OTCBB:ENLAY). Understandably, performance for the fund hasn't been that great over the last few years, but it could be an interesting buy as the nation seems to be moving in the right direction. Expenses are a cheap 0.51% and the fund yields a delicious 4.15%.

Suffering the dueling issues of being both Italian and having major exposure to the torn Middle East, oil giant Eni (NYSE:E) currently can be had for cheap forward P/E of 8.15 and a 4.30% dividend yield. The company continues to explore unconventional assets in Africa and recently unveiled its newest strategic plan, which aims to create production growth of 3% annually.

With emerging markets craving new luxury goods, Luxottica (NYSE:LUX) is poised to benefit. The firm is the producer and owner of several high-end eyewear brands such as Ray-Ban and has been expanding aggressively into East Asia. Following a similar strategy is handbag maker Coach (NYSE:COH), the company operates various retail outlets and will see gains as the emerging market consumer gets richer. Likewise, high-end furniture maker Natuzzi SpA (NYSE:NTZ) could see emerging market consumer gains as well.

The Bottom Line
No group of nations is more hated right now than that of the PIIG'S. For bold investors willing to go against the grain, Italy could offer some of the real deep values. The country's recent elections have pointed towards a new era. The previous stocks, along with Telecom Italia (NYSE:TI), make interesting satellite plays on the nation's recovery.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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