Telefonica: Battered blue chip buy

by Louis Basenese, editor Wall Street Daily

Many blue-chip European companies with rock-solid fundamentals are getting unfairly punished.

And there's one in particular that represents an opportunity too good to pass up. Indeed, my favorite beaten-down European stock right now is Telefonica (TEF), the biggest telephone company in Spain.

In addition to being Spain's dominant phone company, Telefonica is also the largest wireless provider in Britain. It's a major player in Latin America, too, particularly in Brazil.

And no matter what's going on in the world or currency markets, people aren't going to suddenly give up their telephones, mobile phones, or broadband internet connections.

They didn't in the throes of the 2008 global downturn. They didn't last summer. And they won't do it this go-round, either.

At worst, the company might suffer a 1% to 3% drop in sales. But that's hardly enough to justify the current selloff in shares.

If you need more tangible proof, take a look at Telefonica's track record.

The company has increased its sales by an average of about 12% per year, since 2002. Pulling off such a feat doesn't happen unless you operate a business with steady, undeterred and growing demand.

But demand aside, the real reason the latest euro crisis won't torpedo Telefonica's business is simply because the majority of the company's sales - around 60% - don't even come from the eurozone.

They come from Latin American markets, which boast some of the strongest growth potential in the world.

So if anything, Telefonica is actually shielded from the collapsing value of the euro. (Remember, a weaker euro leads to a fatter bottom line, as the company enjoys gains on overseas profits, thanks to currency translation.)

Clueless investors are, of course, overlooking this reality. But let's not be so myopic or foolish. In the end, Telefonica represents one of the bluest-of-blue-chip stocks in the market.

It operates a simple business with ever-steady demand. And it spins off gobs of cash - almost $17 billion in the last 12 months - which management kindly returns to shareholders via dividends.

Mind you, after the latest selloff, Telefonica now sports a safe and attractive 9.5% yield. The fact that the stock's trading on the super cheap, too, only makes the opportunity more irresistible.

At current prices, Telefonica trades at a P/E ratio of just 6.22, which is about 50% cheaper than the average stock in the S&P 500 and well below the company's five-year average P/E ratio of 11.5.

Bottom line: The thought of buying any European stock right now might be downright repulsive.

But the selloff in Telefonica is flat out unjustified. So hold your nose and don't let this rare opportunity for double-digit gains (and yields) pass you by.

Learn more about this financial newsletter at Louis Basenese's Wall Street Daily.