”Europas stora aktierea: BMW och nio andra börsfynd”

BNP Paribas, Richemont, and BMW are among the companies trading at deep discounts.

The holiday season is over and now it’s time to go bargain hunting. For investors, there’s no better place to look than Europe.

Europe isn’t a popular place among investors right now. While U.S. stocks have been soaring, the Vanguard FTSE Europe exchange-traded fund, a leading European ETF, returned just 2% in 2024 including reinvested dividends.

It has gotten so bad that U.S. fund manager Bill Smead of the Smead Value fund found on a recent trip to Europe that all investors there wanted to talk about was the S&P 500 index, which returned 25% in 2024. Europe now seems irrelevant.

It shouldn’t. Despite, or because of, its underperformance, Europe offers actual bargains. The continent’s stocks, at 13 times 12-month forward earnings, trade at record valuation discounts versus the U.S., where the S&P 500 fetches 22 times.

“There is a massive valuation differential,” says David Herro, a manager of the Oakmark International fund. “I’ve never seen such a spread between international stocks and the U.S.” Herro has been managing the fund since 1992.

Some of the valuation gap is deserved. In November, Goldman Sachs analysts wrote that the Stoxx Europe 600 index should have “modest” earnings growth of 3% to 4% in 2025, leading to “positive but low returns” for European stocks. The S&P 500 earnings growth is seen at 12% this year. Europe’s markets have little exposure to technology stocks and their high growth. The biggest European tech companies, software producer SAP and semiconductor equipment maker ASML Holding, weigh in at about a tenth the market value of Apple.

Yet, European stocks are also getting dinged for being European. Goldman Sachs analysts found that every sector of the continent’s market trades at a bigger discount to the U.S. than it historically has. The European energy sector, which trades at about a 50% discount to the U.S., is particularly severe. The leading European oil stock, Shell, now trades eight times 2025 earnings, while Exxon Mobil is at nearly 14 times.

Some might just see this as another example of American exceptionalism. Why invest in Europe when European stock returns have been forgettable at 5% annually over the past decade, versus 13% annually for the S&P 500. What’s more, European markets are dwarfed by the U.S., which accounts for about 65% of the global market value, according to MSCI data. Nvidia, which is valued at $3.3 trillion, is equal in size to the entire U.K. stock market and larger than the main German stock index, the 40-stock DAX, at around $2 trillion.

Herro sees it differently. He views depressed European stocks as a coiled spring that could “explode” to the upside if they ever start to close the valuation gap. Consider BNP Paribas, one of Europe’s largest banks. It has $2.6 trillion in assets against JPMorgan Chase ’s $4 trillion, and its normalized return on equity of 11% to 12% isn’t much less than JPMorgan’s at 14% to 15%, Herro says. Yet, BNP is valued at $70 billion, a tenth of JPMorgan’s market cap, and trades for just six times projected 2025 earnings and for 60% of book value against JPMorgan’s 14 times and two times. It also has liquid U.S.-traded shares, as do all the European stocks listed in this article.

Herro is also partial to luxury goods companies Kering, which owns Gucci, Richemont, the parent of Cartier, and Swatch Group, noting that they have “derated” and now trade for 15 to 20 times projected 2025 earnings. He sees a bottoming in the agricultural cycle that should help stocks like chemical company Bayer and farm-equipment manufacturer CNH Industrial. Depressed liquor producers Diageo and Pernod Ricard also look attractive, Herro says.

The European auto industry has rarely been more disliked by investors due to tough continental electric-vehicle mandates, declining profits from China, and Tesla’s lead in autonomous driving. But cash- and asset-rich, and Mercedes-Benz Group now trade for six times forward earnings.

Matthew Fine, portfolio manager of the Third Avenue Value Fund, favors both. BMW is valued at $50 billion and sits on about $10 billion in net cash at its core automotive business. It’s also been successful with its battery electric vehicles, with its Neue Klasse EVs growing faster than Tesla, admittedly off a much smaller base. “BMW is not in secular decline and it’s not in financial distress,” Fine says.

Mercedes, he says, has been less successful in the EV space but is a very cheap stock. Valued at $60 billion, it has nearly $30 billion of net cash and equivalents at its core auto operations, a stake in its truck business worth another $10 billion, and owns a finance business with a book value of $17 billion. Investors are effectively paying little for the core car business.

The risk in Europe is that it turns into a “vast open-air museum,” to quote the late Blackstone strategist Byron Wien. But with European stocks getting written off by global investors, it may be time to buy.