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Investing Specialists

Our Five Favorite European Stocks

These stocks have sunk for various reasons, but they're still compelling.

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As one of Morningstar's equity strategists and the editor of the Morningstar InternationalInvestor newsletter, I currently manage a live portfolio. This portfolio contains five European stocks that are at or near our 5-star rating. In this article, I'll walk you through the an explanation of the business and our thoughts on the growth opportunities for each of these very different firms.

But before I get to the stocks, I would like to say a few things about Europe in general these days. Despite the strong euro and other currencies, most of the economies continue to do well. Although there has certainly been a slowdown in Ireland, Spain, and, to a lesser extent, the United Kingdom, most of the countries are doing well as exports remain surprisingly strong. Many of the companies I'll discuss are benefiting from continued growth in emerging markets, providing products or services without the direct risk of establishing headquarters in these areas.

 BT Group (BT)
Moat: Narrow | Fair Value Uncertainty: Medium | Price/Fair Value Estimate Ratio*: 0.60
BT, formerly known as British Telecom, is the incumbent fixed-line telephone operator in the U.K. This is not a fast-growing stock, but it generates a ton of cash and yields about 7%. The U.K. is perhaps the most competitive telecom market in the world, and BT has lost significant market share since the telecom market was deregulated. It now only supplies telephone service to about 60% of the country, one of the lowest percentages for an incumbent operator in the world. However, this means it has already gone through the worst of the competitive threats of wireless substitution, as well as telephone service offered by cable television firms or broadband providers.  Virgin Media (VMED), which has about 99% of the U.K. cable market, has been offering phone service for more than 10 years and only covers a little more than half of the population; new subscriber additions have been limited. Broadband providers have been more successful at attracting phone customers, but they still need to use BT for at least part of their service--therefore, these customers continue to generate some revenue for BT. The costs to service these users falls to the broadband provider, which means the profitability to BT isn't significantly lower. BT itself is the largest provider of broadband services. Growth in this product is offsetting the losses in the fixed-line business.

Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.