How To Capitalize On The Eurozone Breakup

Investors rarely have a crystal ball when it comes to market action, but recent events in Europe point the way to some fairly predictable outcomes. I got such clarity after reading comments that German Chancellor Angela Merkel was ready to accept a Greek exit from the Eurozone. Her comments appear related to the fact that upcoming Greek elections have put the euro under renewed pressure.

Greek elections in 2012 threw global markets into a tailspin when it looked like the Syriza party could take control and push a hard line against European Union bailout demands. The iShares MSCI EMU (NYSEMKT: EZU) , which tracks the EU countries, plunged 13.5% in May of that year, while the S&P 500 dropped 7.6% over the same period.

Polls now suggest that Syriza will take control after the January 25 vote. The party's leader, Alexis Tsipras, has already promised that the country will, "write down most of the nominal value of debt... That's what was done for Germany in 1953, it should be done for Greece in 2015."

The potential for a breakup of the euro zone sent the markets reeling just two years ago. While it hasn't affected the stock market much yet in 2015, will prices hold up when the markets open on January 26?

Preparing For The End

A Greek exit of the European Union, once deemed unspeakable, is now likely to be "manageable," according to German magazine Der Spiegel. The uncertainty has caused yields on 10-year Greek bonds to jump to 9.4%, but this has only had a modest impact on the bonds of periphery countries like Portugal and Italy.

The euro, already falling from the prospect of more monetary stimulus by the European Central Bank, has dropped nearly 5% over the past month against the dollar, extending a losing streak that began in August.

While a Greek exit from the eurozone and debt restructuring would mean hard times for Greece, the potential for contagion to the rest of Europe (and elsewhere) is significantly diminished this time around. The Bertelsmann Foundation estimated that Greece owed Germany 130 billion euros in 2012, but that tab has since dropped to just 50 billion euros in loan commitments. U.S. banks have almost no exposure to Greece at this point.

The plunge in oil prices over the last quarter should provide support to global economic growth this year. Beyond the boost to the economy, the drop in energy costs are likely to keep a lid on inflation and give central bankers a reason to keep rates low for most of the year.

Winners And Losers Of A Potential Greek Tragedy

Despite the relative optimism, there will be winners and losers with a Greek exit from the eurozone. Smaller companies with regional sales are likely to get hit the hardest on any local economic weakness. The euro is likely to remain under pressure as uncertainty over further exits combines with a more accommodative central bank to keep the currency weak.

In anticipation of further weakness in the euro, a range of fresh opportunities emerge.

Take Belgium-based Koninklijke Philips N.V. (NYSE: PHG ) as an example. The $26 billion firm (in market value) got its start in lighting more than a century ago, but is shifting its focus to healthcare and consumer goods. It derives roughly 75% of total revenue from outside Europe, with 37% of the total from emerging markets. That means a weaker euro should boost Philips' relative competitiveness.

Philips expects to spin-off its lighting business by the end of this year, which could unlock shareholder value. Shares trade for a 0.96 times sales multiple, just below the five-year average multiple of one times trailing sales, but well below the industry average multiple of 4.1 times.

Unilever N.V. (NYSE: UN ) is a $111 billion diversified packaged food and personal products company based in Netherlands and the United Kingdom. Sales outside of Europe account for the majority (73%) of the total and emerging markets revenue (57% of total sales) grew by 8.7% in 2013.

The company has been actively reorganizing lately, selling food brands but acquiring more personal care businesses. The strategy has worked well with its international expansion. The recent launch of TRESemme in Brazil added almost 150 million euros to sales, one of its most successful launches ever.

Shares are not necessarily cheap at seven times sales, above the stock's five-year average multiple of 5.9 times, but sales are expected to be 4% higher in 2015 and the stock pays a 3.9% yield.

A weaker euro could mean an additive effect on earnings when profits from strengthening currencies are translated back into domestic currency. The euro has depreciated 7.8% against the dollar over the last three months and 3.4% against the yen since the beginning of the year. Further weakness could be a tailwind to profits for both companies this year.

Investors may want to short the euro through a fund such as the CurrencyShares Euro ETF (NYSE: FXE ). Some investors use ETFs like these as a hedge against their long stock positions. Increased monetary stimulus is likely when the ECB meets on January 22, which will further depress EU yields and drive investor outflows to stronger currencies.

Even if the weaker euro and a Greek exit are ultimately good for the region, the uncertainty over the next few months will likely keep the euro under pressure. A short on the euro fund will help hedge downside risk on the region's stocks if a Greek exit sends the market into a tailspin once again.

Risks To Consider: The ECB meeting on the January 22 and the Greek elections on the January 25 are sure to boost volatility for the euro and shares of European companies. Be ready for large swings in stock prices before any resolution, but larger companies with overseas sales should be relatively protected.

Action To Take --> A weaker euro could mean strong gains for European companies with overseas sales. Take advantage of upcoming Greek elections and monetary policy to short the euro against a portfolio of large companies that should perform with the global economy.

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

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

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