15 Stocks That Could PLUNGE on News from Europe

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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...


 
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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , International

Referenced Stocks: AA , CLX , DELL , KMB , PG

David Sterman

David Sterman

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