International expansion has been the top goal of hundreds of
U.S. blue-chip stocks. Tapping foreign markets has been an easy way
to keep sales and profits growing, usually with little risk.
Until now...
Even as Greek voters chose to stay on the path of austerity (for
now), rising
bond
yields in Italy and Spain are signaling even more pain to come for
the Europe.
This coming
earnings season
is likely to be quite painful for many companies that have ventured
abroad. Not only are many European economies in
recession
, but a number of
emerging markets
are feeling the pain as well. China, for example, has resorted to
another round of stimulus to keep its economic deceleration from
snowballing.
That's why it's now more important than ever for U.S. investors to
pay attention to their stock holdings that have significant
exposure to Europe.
Just like the first quarter?
Remarkably, companies with significant international exposure were
often able to deliver solid results in the first quarter of the
year. Trouble is, global business conditions have gotten even worse
in the past 90 days. Even if these companies manage to come close
to meeting second-quarter forecasts, they might sharply lower
forward guidance.
This isn't to say all sectors will feel the same pain. Utility
stocks and telecom service providers, on average, derive more than
95% of sales right here in the United States. Financial stocks have
only 15% exposure to foreign markets, and for regional banks, this
figure is often close to zero.
Yet many other sectors are quite vulnerable to further sector
weakness. Take consumer staple stocks such as
Procter & Gamble (NYSE:
PG
)
,
Clorox (NYSE:
CLX
)
or
Kimberly-Clark (NYSE:
KMB
)
as examples. Each one of these firms derives more than one-third of
sales from foreign markets and each company is still expected to
boost sales in 2012 and 2013. Will that forecast remain in place
once a sobering worldview is discussed when second-quarter results
are released?
The materials sector also feels the pain, with average global
exposure of around 45%. This helps explain why
shares
of
Alcoa (NYSE:
AA
)
, continued to trade at a sharp discount to levels seen a few years
ago. I still expect Alcoa and other materials providers to move
nicely higher over the next few years, but the coming quarter
should provide little cheer.
The key is to find these stocks when they have solid support in
place in terms of their
asset
value. There are many bargains in the materials sector, which is
great for long-term value hunters, but of little consequence to
short-term traders.
Whither high tech?
In recent weeks,
Dell (Nasdaq:
DELL
)
and
Cisco Systems (Nasdaq:
CSCO
)
warned of even deeper weakness in their European operations. Expect
to hear from more technology firms about Europe in coming weeks.
Some may pre-announce results soon rather than wait for the
scheduled reporting date.
Even companies with just 20% to 30% of sales derived from abroad
may be hard-pressed to deliver the forward guidance analysts are
currently anticipating. Simply put, weakening foreign sales may be
the key theme of this upcoming earnings season. And this could
bleed over into slumping stock prices.
Because the tech sector has so much exposure to Europe and Asia, I
went looking for stocks that might be especially vulnerable. So
many companies in this space have been relying on foreign markets
for growth in the past decade, which looks like a big millstone
right now.
I'm most concerned about tech stocks with high valuations. Take the
"40/40" club, for example. These are stocks that trade for more
than 40 times projected 2012 profits and derive at least 40% of
their sales outside the U.S. All told, I've found 15 stocks that
make the list...
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This list by definition only includes companies that are expected
to be profitable in 2012, because I screened for stocks with
positive forward P/E (price-to-earnings) ratios. Any money-losers
may be equally (if not more) vulnerable, even if they didn't make
the list above.
Risks to Consider:
These stocks are not automatic sell candidates, nor are they
ripe for shorting. In some instances, weak foreign sales are
already reflected in share prices.
Action to Take -->
The stocks in this list aren't the only ones you should be worried
about. You should be checking the European exposure for each
company in your portfolio, while checking its valuation.
The key is to focus on companies that appeared to perform quite
well in recent quarters, shrugging off the foreign headwinds that
had just been emerging. These headwinds are now growing stronger
and it's hard to see how those companies can overcome the
gravitational pull of a sagging Europe and Asia.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of AA, CSCO, PG, in one or more if its "real money"
portfolios.