BEST EURO STOXX 50 SHARES TO BUY & REVIEW OF PAST RECOMMENDATIONS
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17th April 2023
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My recent update of the charts for the stocks in the Euro Stoxx 50 index, covered 44 stocks (the latter number is slightly less than 50, as the UK stocks in this index are included in the FTSE 100 section of this website).
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A total of 30 stocks were found to have a positive outlook, and 14 have a negative outlook, per the chart analysis. This 2 to 1 factor in favour of bullish stocks, provides further evidence that the overall market is in bullish mode, and that the upward trend is broadly based. One can sometimes detect weakness in a rising market, when most of the gains have been concentrated in a small number of leading stocks - but that is clearly not the case here.
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Review of past recommendations:-
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Only two stocks survived the cull that I decided to make in the December 2022 review; Essilor-Luxottica and Deutsche Borse. Their charts are still bullish, so no changes recommended there.
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Perhaps that 'cull' in December 2022 went a little too far, in the case of L'Air Liquide and Sanofi, both of which were recommended in June 2022. In my follow up, I recommended sales of these, following six months of underperformance. However, both stocks now have very bullish charts once again.
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Three stocks that were recommended in the November 2021 review, were also 'culled' in the December 2022 review; Deutsche Post, Mercedes and Volkswagen but all three have bullish charts once again.
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The conclusion from this review of past recommendations of Euro Stoxx 50 shares, therefore, is that I have been too hasty in recommending some of the sales of these. In my defence, those decisions were made partly because the list of stocks recommended had become somewhat too large and unwieldly. That reflects a scenario that investors are often faced with - if one keeps adding to a portfolio of shares, then the impact of the existing holdings is gradually reduced. Better to sell your weakest stock, to 'make room' for a new stock that looks like a good opportunity.
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New recommendations:-
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The recently completed technical analysis revealed that six stocks had very bullish charts; L'Air Liquide, Sanofi, Vinci, Deutsche Telekom, Axa and Ahold Delhaize.
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I will eliminate the first two stocks above from consideration, as they were both in and then out of the recommended porfolio last year. Of the four remaining stocks, the two that appear to have the most bullish looking charts are Vinci and Deutsche Telekom.
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(i) Vinci
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Share price: €108.32
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P/E ratio (trailing twelve months): 14.5
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Expected dividend yield: 3.69%
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If one were asked, in which country is the largest construction company in the world headquartered - the response from most investors would probably be the USA, or perhaps China....however the somewhat surprising answer is .... France.
Vinci, is named after the Italian polymath Leonardo da Vinci, who spent his final years in France, and was founded in 1899. It has three main businesses; concessions, construction and property.
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'Concessions' are contracts granted by the government to companies to finance, build and operate vital parts of the infrastructure such as roads and airports. Vinci has a dominant posistion in its home market in France, where it is the leading concession holder for motorways. It also owns, or part owns, 65 airports, including a 50.1% stake in Gatwick airport, and has a global construction and property business.
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Vinci has exploited its infrastructure experience in France, and is building a worldwide business by winning similar contracts using this know-how. For example, it was recently awarded two major road link projects in Australia and New Zealand, and 55% of its revenue is now earned outside of France.
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Vinci's infrastructure operations, and related businesses, make it a cash rich stock with defensive qualities. In February 2023, it issued guidance to the market, saying that it was confident about prospects for 2023. A share buy back (and cancellation) program was recently announced, beginning in April 2023, until October 2024 and this will be earnings enhancing as it will reduce the number of shares in issue.
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The shares are trading on a reasonable price to earnings ratio of 14.5 (current share price divided by the total earnings per share for the most recent 12 month period), and the forecast dividend yield is an attractive 3.69%. There are huge barriers to entry to the infrastructure business, as governments are unlikely to award contracts to any new operators with little experience, favouring a behemoth such as Vinci.
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Infrastructure requires constant reinvestment, as roads deteriorate and airports expand etc, therefore Vinci should prove to be a stock with sufficiently robust qualities to appeal to conservative investors.
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(ii) Deutsche Telekom
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Share price: €22.22
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P/E ratio (trailing twelve months): 14.6
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Expected dividend yield: 3.15%
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Deutsche Telekom recently announced that it now holds more than 50% of the shares of the US mobile phone company T-Mobile ( symbol: TMUS).
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T-Mobile has a very high P/E of just over 60 times earnings, as investors expect to see rapid growth due to the roll out of 5 G, making it the world's largest and highly rated telecommunications company. An indication of this growth rate can be seen in T-Mobile's new subscriber figures for 5 G broadband, which was 546,000 in 2021, and jumped to 2 million in 2022.
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T-Mobile's market capitalisation is $182.4 billion. 50% of that figure is $91.2 billion, which equates to €82.9 billion, at the current exchange rate. Deutsche Telekom's market capitalisation is €110.5 billion. That means that you are getting its entire business outside the USA for €27.6 billion. That is roughly the market capitalisation for Vodafone which has 210 million customers. Deutsche Telekom has 160 million customers outside of the US, and its 'churn' rate (i.e. subscribers not renewing) has recently been lower than Vodafone's, so that valuation looks about right.
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T-Mobile has better technology for the roll out of 5 G in the US, than its competitors, AT & T and Verizon according to most commentators in the telecom media.
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The 'Simply Wall Street' website recently said that Deutsche Telekom looks like a great dividend stock with its expected yield of 3.15%, and has a sufficiently strong cash flow to maintain this level of dividend.
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This provides investors with a rare opportunity of investing in a stock that pays a relatively high dividend (by US standards), and has high earnings growth prospects through its 50.2% owned subsidiary T-Mobile. High dividends are usually paid by 'mature' companies that have little or no growth prospects, whereas rapid growth stocks typically pay no dividends, to conserve the capital required for the expansion of the business. Investors usually have to pick between one or the other.
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Deutsche Telekom is currently offering investors both a high dividend, and the prospects of rapid earnings growth, and that is why the shares have hit new highs recently, and look set to move higher in the short to medium term.