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Monday Winners: A Banner Day for European Banks

By: David Sterman
Posted: 5/10/2010 11:56:00 AM
Referenced Stocks: AIB;BBV;BCS;CAGC;CEDC;CETV;DEER;HRBN;ING;STD

As European countries step up in support of Greece (and by extension the banks who are lending to that troubled country), it should come as no surprise that major European bank stocks are posting strong gains in Monday trading. Shares of Netherlands-based ING ( ING ) , Spain's Banco Santander ( STD ) and Banco Bilbao Vizcaya ( BBV ) are all up more than +20% today, while other banks such as Barclays ( BCS ) and Allied Irish Banks ( AIB ) are up roughly +15%.

This might prove to be a nice exit for investors that held on through last week's panic. After all, the economic woes in Greece could still spread throughout southern Europe, which would likely crimp economic growth rates across the continent. It's worth remembering that very few investors anticipated the absolute meltdown among financial stocks a few years ago. And though many banks' balance sheets have been recapitalized, the economies in which they operate are still in for tough sledding. In this environment, a massive rebound in bank stocks should lead you to consider profit-taking.

What the market taketh away, the market giveth. That's a reverse of an old axiom, but certainly applies to Central European Media (Nasdaq: CETV) and Central European Distribution (Nasdaq: CEDC) . Both of these firms operate in Eastern Europe, both saw their shares fall by double digits on Friday, and both have seen their shares bid up by a similar amount this morning.

The wild swings in these two stocks are not the result of Thursday's massive sell-off or this weekend's Greek bailout. Instead, Central European Media noted a first-quarter slowdown in ad spending on its cable TV systems in countries like Hungary, Poland and Bulgaria, while Central European Distribution saw a similar spending pullback for beer and liquor sales in the region.

Why the snapback? If you dig into the management commentary from both conference calls, you'll hear  an expectation for a rebound in the second half of the year. That's because recent austerity measures, which had crimped consumer spending, are starting to ease.

Both of these firms have worked over the years to consolidate their fragmented markets, making a never-ending string of acquisitions. Those deals are still being digested, which accounts for some of the hiccups in quarterly results. But as those deals are fully-integrated, these two companies still look like the best way to play the rising Eastern European consumer, whose per capita spending still badly lags that of Western Europeans.

It's been a tough spring for many China-based stocks, as concerns mounted that the world's fastest-growing major economy would soon overheat and then sharply cool. Shares of many Chinese ADRs currently trade closer to their 52-week lows than their 52-week highs, but a slew of earnings reports this morning highlight the fact that many companies are still growing at an impressive clip.

For example, China Agritech (Nasdaq: CAGC) , a leading fertilizer manufacturer, announced Monday that first quarter sales had more than doubled. The news was good for a high single-digit pop in the stock (albeit on a morning when many stocks are making sharp upward moves). Despite the move, shares trade for half their 52-week high and are valued at about seven times projected cash flow (and a little less than 20 times projected GAAP profits).

The key question is whether China's agricultural boom has more room to run, or is the sector in fact reaching maturity. A shortage of water in growing regions, coupled with a lack of arable land could constrain further growth. Then again, if China eventually lets its currency float , as many expect, then the government will be more inclined to push for further gains in domestic agricultural production to offset any lost revenue from manufacturing exports. One thing is for sure: even if the factory sector cools, the agricultural sector will still be in strong demand, as more Chinese join the middle class. China Agritech is likely to continue to see very strong demand during the next few years.

Among other Chinese stocks, Harbin Electric (Nasdaq: HRBN) , which makes electric motors, is up nearly +20% on strong quarterly results. Small appliance maker Deer Consumer Products (Nasdaq: DEER) is up about +8% after also posting solid results. Shares have slipped since P/E play.

Company Name (Ticker) Intra-Day Price Market Cap 52-Week High 52-Week Low 2010* P/E 2011* P/E
China Agritech (Nasdaq: CAGC) $14.37 $252M $31.66 $0.66 16.5 15.6
Deer Consumer (Nasdaq: DEER) $8.95 $290M $18.97 $5.09 12.4 9.7
Harbin Electric (Nasdaq: HRBN) $20.07 $622M $26.00 $9.61 9.0 7.5
Central European Media (Nasdaq: CETV) $27.31 $1.7B $38.77 $16.70 N/A N/A
Central European Distribution (Nasdaq: CEDC) $29.90 $2.1B $39.95 $19.75 11.7 9.8
*Based on consenus estimates prior to recent earnings release

-- David Sterman
Contributor
StreetAuthority

Disclosure: David Sterman does not own shares of any security mentioned in this article.