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Enthusiasm for German stocks may be waning among U.S investors. As prices linger near record highs and the Eurozone’s largest economy shows signs of slowing down, other countries in the region present more attractive options.

Economic Weaknesses

In July, investor confidence in Germany fell for the seventh consecutive month, ending up behind economist estimates. Industrial production declined for the third successive month in May. Additionally, a decline in factory orders in July exceeded estimates.

Other economies have far better reports on show. For instance, Spain’s manufacturing PMI increased more than estimated in June. Additionally, industrial output and retail sales increased in May. Italy and Portugal also experienced an increase in retail sales, during April and May, respectively

Markets Hit Record Highs

In sharp contrast, German stocks have continued to move higher. The benchmark DAX index increased to a record high this month. The level was extremely close to its highest valuation achieved since 2009.

Last month, the DAX moved above the 10,000 mark for the very first time. Ultimately, the benchmark index reached a record high on July 3. The DAX has declined 2.9% since then after concerns over the Ukraine crisis intensified.

The bigger issue is that these impressive levels are not being supported by economic indicators. Germany has fallen behind other countries in the Eurozone, at least in the short term.

Weaker Bourses Gain

During the sovereign-debt crisis, the DAX had become a safe haven for investors. The idea behind investing in Germany was that the nation’s export oriented corporations would draw on global growth to ride out regional concerns. This led to a 25% growth for the benchmark over the last two years.

However, the DAX has gained only 1.9% this year though it remains around record highs. In contrast the Italian FTSE MIB has gained 10% while the Spanish IBEX 35 has increased 7.4%. To put things in perspective, the Stoxx Europe 600 Index has moved up 4.3% this year.

Room at the Top

According to data from Bloomberg, the index of German stocks is trading 13.7 times more than estimated earnings. The gauge’s valuation touched 14.1 on Jul 3, close to the highest level achieved since Dec 2009.

On the other hand, Spain’s benchmark is 50% below the peak it achieved in 2007. Italy’s benchmark and Portugal’s PSI 20 would have to double their current levels to achieve the highs they hit the same year.

Valuation Advantage

This indicates that it is logical for investors to opt for other destinations in the Eurozone. But why would U.S. investors opt for potentially riskier options in the region? Valuations are the first reason, which have dominated market discourse in recent times, prompting remarks even from the Fed Chair.

Several analysts have underlined the fact that European stocks are undervalued compared to their American counterparts. This gives them greater scope for growth and the ability to outpace U.S. stocks performance.

ECB Stimulus

Additionally, market watchers believe the ECB will continue to support the Eurozone economy. ECB President Mario Draghi has already unveiled several decisive monetary measures. These include a negative deposit rate and long term refinancing measures.

Draghi also said the ECB is working on the specifics of an asset purchase plan. In effect, the Eurozone is putting in place details of stimulus measures even as the U.S. works toward winding down monetary easing. This gives investors another reason to invest in Europe.

Our Choices

Spain and Italy are two new investor destinations in Europe given the current political climate. Below we present three stocks from these countries which possess the potential to grow appreciably, each of which also has a good Zacks rank.

Banco Santander, S.A. (SAN - Snapshot Report) is a commercial bank based in Spain. The bank primarily operates in Spain, the U.K., Portugal, Latin America and the U.S. The bank has four operational segments. These are Sovereign, the U.K., Continental Europe and Latin America.

The Sovereign segment handles all financial operations of Banco Santander’s U.S. subsidiary Sovereign Bank. This includes retail and wholesale banking operations as well as insurance and asset management.  

Banco Santander holds a Zacks Rank #2 (Buy) and has expected earnings growth of 16.70%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.94.

Eni SpA (E - Analyst Report) is engaged in oil and gas, electricity generation, petrochemicals, oilfield services and engineering industries along with its consolidated subsidiaries. The company is based in Rome, Italy.

The company’s major business segments are Exploration and Production (E&P), Gas and Power, and Refining and Marketing. The company conducts its major exploration and production activities for hydrocarbons.

Currently the company holds a Zacks Rank #3 (Hold) and has expected earnings growth of 7.40%. It has a P/E (F1) of 14.91.

Telecom Italia S.p.A. (TI - Snapshot Report) is an Italian company operating in the communications sector. The company offers fixed and mobile services for the national and international telecom sector. The company conducts its activities through five business units.

Telephone and data services, both fixed and mobile are provided by the domestic unit. The Brazil and Paraguay units offer mobile services while the Argentina unit offers both fixed and telecom services.  The company also has a media unit and offers office products and services through its Olivetti unit.

Apart from a Zacks Rank #3 (Hold), Telecom Italia has expected earnings growth of 14.70%. It has a P/E (F1) of 13.14.

A German Resurgence?

It is difficult to deny the fact that Germany has companies which are the most efficient and competitive compared to others in the Eurozone. The crisis in Ukraine has dented market fortunes. But given the nation’s inherent strengths, a recovery may not be far off. However, the question about high valuations remain, which is why investors may find other options lucrative This is why these stocks would make good additions to your portfolio.

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