Geopolitical concerns raise their ugly head again in Europe as Ukraine issued a Monday morning ultimatum to pro-Russian separatists to lay down arms or face an all-out anti-terrorist operation by the country’s armed forces – developments which could ignite fresh hostilities with Russia and which led the United Nations Security Council to hold an emergency session last night.
This is something European stocks didn’t need, considering the bearish trend prevailing over the past few days, precipitated by a sell-off in US tech stocks. Last week European stocks suffered their worst weekly decline of the month after the Europe Stoxx 600 index lost 3.1% on the week, closing at 328.77.
An April 7, 2014 research note by Morgan Stanley analysts Matthew Garman, Graham Secker, Krupa Patel and Hanyi Lim that contains the results of their European sell screens is, therefore, timely.
European recovery done to death?
“We believe that following funding costs, depressed ROE, attractive normalized valuations and continued improvement in macro data is likely to support the case for Overweight periphery over the longer term,” says the research note.
On the flipside, the analysts cite the “elevated levels of sell ideas” as a basis for a view that, maybe, investors had expected too much from the peripheral recovery story out of Europe – raising concerns that this trade might be overbought as of now.
Europe: Multiple appearances in sell screens
The analysts are struck by the rise in the number of sell ideas thrown up by the screens amongst the sectors that expect to benefit most from a Eurozone recovery.
“19% of our ‘multiple appearances’ (stocks appearing in more than one screen) are Financials which is the highest level May 2007, while the share from the Periphery is also at a seven-year high,” observes the note.
The screens include:
- Weak fundamentals – ‘Greenblatt (Low ROCE and High EV/EBITDA)’, ‘Reverse Intelligent Investor ‘,
- Overly bullish sentiment – ‘Over Loved, Over-Owned and Overvalued,’ ‘Hype Stocks,’ ‘Infra-Sector Hype Stocks,’
- Fully valued – ‘Expensive Outperformers,’
- Financial strength/Balance sheet – ‘Anti-LBO,’ and ‘Piotroski.’
Multiple appearances as a ‘sell’
Companies which appeared as sell candidates across multiple screens are listed in the table below. Note that the highlighted stocks are rated as Underweight by Morgan Stanley. Also note that the first seven companies at the top of the list appeared in three screens.