Run for the hills- the European economy is collapsing. Well, maybe, but it looks pretty bad. So what is an investor to do?
It’s natural to assume European stocks, European financial stocks, and especially Spanish banking stocks are obvious things to avoid. But you might be mistaken. For one, Banco Santander (STD), Spain’s largest bank at the heart of the European financial apocalypse, is looking significantly undervalued.
Banco Santander has taken a serious hit from the economic turmoil in Spain. Shares are down over 43% this year, and 21.4% this quarter. The stock is trading like it’s near bankruptcy, but some analysts are arguing that investors are simply unable to see past the current perception.
Consider: Far from being reliant on the financial solvency of Spain and its European neighbors STD has more diverse international financing than its peers. In 2011 it took more profits from Latin America (56%) than Continental Europe and the United Kingdom (29%) combined. So in actuality, the revenues from Spain and Portugal (13%) are quite small.
According to Calman Valores on Seeking Alpha, “the bank continues to exhibit strong risk management practices, through reducing loan exposure to troublesome markets, de-leveraging its balance sheet and taking measures to increase liquidity. Even with the further deepening of the Spanish economic crisis its credit risk indicators are still healthy and within acceptable parameters.”
Zacks research and ratings indicate Banco Santander has a target price of $14.93 – a potential upside of 151.7% – and average risk levels.
According to the Wall Street Journal, Santander’s Wednesday 4.22% gain, bullish after hour trading and small gains on Thursday had little do with this. Instead, the Journal wrote “The Bank of New York index of ADRs climbed 2.8% to 113.69 as European Central Bank President Mario Draghi said markets are underestimating political leaders’ commitment to address the euro crisis.”
This might strike you as interesting. It wasn’t so many months ago that the entire markets rose and fell with the degrees of insecurity felt about Europe’s, mainly Greece’s, prospects. The high correlation offered a wealth of opportunities for traders to buy in at low prices before a calm (however brief) soothed the masses.
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If Banco Santander indeed has relatively little exposure to the European financial crisis, it is arguably trading at an unfairly low valuation. But, as it is often said, “Markets can remain irrational a lot longer than you and I can remain solvent.”
Do you think Banco Santander will stand on its own?
Use the Compar-O-Matic to compare STD’s performance with other large international banks:
Turbo Chart: Compare STD’s performance against the S&P 500 index: