European markets advanced on Wednesday as investors remained optimistic about a potential economic recovery following the coronavirus lockdowns. The pan-European Stoxx 600 closed 0.74% higher on Wednesday, with the other major indexes also posting gains. The World Health Organization warned, however, that while the spread of the Covid-19 virus has slowed in Europe, it is spiking in other parts of the world.
As a result of this renewed optimism, investors may be interested in European consumer defensive companies that are trading below the Peter Lynch value since their products are in demand regardless of economic conditions.
A renowned investor who generated an average annual return of 29% while managing Fidelity’s Magellan Fund, Lynch developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener, a popular Premium feature, also looked for companies with a business predictability rank of at least two out of five stars and a 10-year revenue per share growth rate of at least 6%.
The screener found stocks that met these criteria as of June 17 included Koninklijke Ahold Delhaize NV (XAMS:AD, Financial), Sapmer (XPAR:ALMER, Financial), LDC SA (XPAR:LOUP, Financial), New Nordic Healthbrands AB (OSTO:NNH, Financial) and Norway Royal Salmon ASA (OSL:NRS, Financial).
Koninklijke Ahold Delhaize
The Netherlands-based retailer, which operates supermarkets and e-commerce businesses, has a market cap of 25.05 billion euros ($28.09 billion); its shares closed at 23.52 euros on Tuesday with a price-earnings ratio of 13.07, a price-book ratio of 1.78 and a price-sales ratio of 0.38.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 7 out of 10 supports this assessment even though its share price and price-sales ratio are near multiyear highs.
GuruFocus rated Koninklijke Ahold Delhaize’s financial strength 6 out of 10. Although the company has issued approximately 1.5 billion euros in new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 2.26, however, indicates the company is under some pressure since its assets are building up at a faster rate than revenue is growing.
The company’s profitability scored an 8 out of 10 rating, driven by an expanding operating margin as well as strong returns that outperform over half of its competitors and a moderate Piotroski F-Score of 6, which implies business conditions are stable. Due to consistent earnings and revenue growth, Koninklijke Ahold Delhaize also has a four-star predictability rank. According to GuruFocus, companies with this rank typically return an average of 9.8% annually over a 10-year period.
Sapmer
The French seafood company, which catches and processes a variety of fish and crayfish, has a market cap of 36.4 million euros; its shares closed at 10.4 euros on Tuesday with a price-earnings ratio of 2.95, a price-book ratio of 0.36 and a price-sales ratio of 0.2, which GuruFocus noted are all near 10-year lows.
According to the Peter Lynch chart and GuruFocus valuation rank of 10 out of 10, the stock is undervalued.
Sapmer’s financial strength was rated 4 out of 10 by GuruFocus. While the company has adequate interest coverage, the Altman Z-Score of 1.75 warns it could be at risk of going bankrupt. The return on invested capital, however, is nearly two times the weighted average cost of capital, indicating it has good profitability.
The company’s profitability scored an 8 out of 10 rating on the back of strong margins and returns that outperform a majority of industry peers and a high Piotroski F-Score of 7, which implies business conditions are healthy. Despite recording a slowdown in revenue per share growth over the past year, Sapmer also has a 2.5-star predictability rank. GuruFocus says companies with this rank typically return 7.3% per year on average.
LDC
The French company, which processes and sells a wide range of poultry products, has a market cap of 1.88 billion euros; its shares closed at 110 euros on Tuesday with a price-earnings ratio of 12.85, a price-book ratio of 1.4 and a price-sales ratio of 0.44.
Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 2 out of 10, however, leans more toward overvaluation since the share price and price-sales ratio are near one-year highs.
GuruFocus rated LDC’s financial strength 7 out of 10. Despite issuing 248.01 million euros in new long-term debt over the past three years, it is manageable due to having a comfortable level of interest coverage. The Altman Z-Score of 2.85, though, indicates the company is under some pressure since its assets are building up at a faster rate than revenue is growing.
The company’s profitability scored an 8 out of 10 rating on the back of operating margin expansion, returns that outperform over half of its competitors, a moderate Piotroski F-Score of 5 and consistent revenue growth. LDC also has a 4.5-star predictability rank, which, according to GuruFocus, means it typically returns an average of 10.6% per year.
Bestinfond (Trades, Portfolio) held 0.6% of the company’s outstanding shares as of the first quarter.
New Nordic Healthbrands
The Swedish company, which develops herbal supplements, remedies and personal care products, has a market cap of 354.37 million Swedish krona ($37.8 million); its shares closed at 57.2 krona on Tuesday with a price-earnings ratio of 13.25, a price-book ratio of 3.29 and a price-sale ratio of 0.76.
The Peter Lynch chart suggests the stock is undervalued. The GuruFocus valuation rank of 3 out of 10, however, leans more toward overvaluation even though its share price and ratios are near multiyear lows.
New Nordic Healthbrands’ financial strength was rated 6 out of 10 by GuruFocus, driven by comfortable interest coverage and a robust Altman Z-Score of 5.03. The ROIC is also significantly above the WACC, indicating good profitability. The company may be becoming less efficient, though, because its assets are building up at a faster rate than revenue is growing.
The company’s profitability fared even better, scoring an 8 out of 10 rating on the back of an expanding operating margin and strong returns that outperform a majority of industry peers. On a negative note, New Nordic’s Piotroski F-Score of 3 suggests business conditions are in poor shape. In addition, even though the company has recorded consistent earnings and revenue growth, its three-star predictability rank is on watch. GuruFocus data shows companies with this rank typically return an average of 8.2% per year.
Norway Royal Salmon
Headquartered in Norway, the company, which operates a salmon fish farm, has a market cap of 9.81 billion Norwegian krone ($1.03 billion); its shares closed at 228.6 krone on Tuesday with a price-earnings ratio of 7.67, a price-book ratio of 3.03 and a price-sales ratio of 1.8.
According to the Peter Lynch chart, the stock is overvalued.
Norway Royal Salmon’s financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to adequate interest coverage, the company is being supported by a high Altman Z-Score of 7.34 and a ROIC that surpasses the WACC, indicating good profitability.
The company is also being boosted by an expanding operating margin, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 7. Despite having steady earnings and revenue growth, Norway Royal Salmon’s three-star predictability rank is on watch.
Disclosure: No positions.
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