My No. 1 Euro Zone Play Could Make You Big Profits By Summer

Joseph Hogue's picture

Tuesday, March 17, 2015 - 7:30am

by Joseph Hogue

Six years after the collapse of global financial markets, it seems most countries missed their invitation to the economic growth party. Massive monetary stimulus was supposed to jumpstart economies, but it seems the United States is dancing by itself. 

China is still growing impressively, but mostly by state-led investment spending, and growth is slowing every year. Japan has yet to really benefit from its own monetary stimulus, as Prime Minister Shinzo Abe's arrows seem to have missed their mark. 

Europe is really the place to watch. Acting the old codger, Europe completely shunned the monetary stimulus party in favor of restrictive fiscal cuts. The European Central Bank (ECB) only recently, and grudgingly, accepted the invitation. But there are signs that its stimulus program may be the economic story of 2015.

Taken together, the euro zone is the largest economic region on the planet at $18.45 trillion. If the region meets its expected 1.5% growth rate for 2015 it would be the fastest growth since 2010. This should help boost investor confidence as the region finally digs itself out of five years of economic stagnation.

The central bank just started its 19-month program to pump more than $60 billion a month into the system through debt purchases, but it may already be showing green shoots. Bond rates in riskier countries like Portugal and Spain declined recently even on the flare up in Greek negotiations. 

In fact, some rates are falling so far that they are dropping under the -0.2% limit that is set on the central bank's purchases. According to Bank of America Merrill Lynch (NYSE: BAC), the average rate for investment-grade debt is just 0.89%, a record low.

Lower rates are setting off a rush of corporate debt deals, with U.S. firms getting in on the action. Coca-Cola (NYSE: KO), for example, issued $9.5 billion in two- to 20-year bonds in euros. 

The immense amount of liquidity coming to the European market could spark investment and economic growth. At the same time, the plummeting euro, falling 24% over the past year against the greenback, is making European companies and assets even cheaper and could lead to a wave of intercontinental buyouts. 

As positive as the news could get on Europe, I am not drinking the punch just yet. The region has disappointed before and many members of the ECB continue to rail against monetary easing. 

Fortunately, one of the best ways to play the possibility of European growth is a low-risk blue chip that's right here in the U.S. of A. 

With a market cap of more than $250 billion, General Electric (NYSE: GE) is one of the world's largest and most diversified global conglomerates. It operates in seven industry segments and provides financing through its GE Capital division. 

Sales from the euro zone, at $25.3 billion last year, are about a third of the size of domestic sales but account for the company's second largest market.

General Electric also holds more than a quarter of its total global assets in Europe. The surging U.S. dollar and weak euro have weighed on asset growth over the past year, but any turnaround in the euro zone could reverse this and present another tailwind for the company. 

Even if global economic growth disappoints, the company should benefit from its wide economic moat. Morningstar analysts note that, through a repositioning, GE has achieved its targeted earnings mix of 75% from industrials and 25% from GE Capital. Furthermore, the sheer size of the company's installed base of physical assets helps create a high barrier to entry.

To be sure, it takes a lot to turn a $250 billion ship. The company is expected to report quarterly earnings of $0.30 per share in mid-April, down 9% from a year ago. But full-year EPS is expected to grow 5% to $1.73. 

Shares have traded with an average P/E of 16.4 over the past five years, so I would consider GE fully valued around $28. That is 12% higher than current prices, but using a deep in-the-money call option, we can amplify that return to 60%.

GE Call Option Trade 

With shares of GE trading around $25 at the time of this writing, I am interested in buying GE Jun 20 Calls for a limit price of $5. Buying the June options gives me some time to see the European growth story play out and benefit from a potential earnings surprise when the company reports in mid-April.

The trade breaks even at $25 ($20 strike price plus $5 options premium). If GE hits my $28 upside target, the call options will be worth at least $8 ($28 share price minus $20 strike) for a gain of 60%. Place a good 'til cancelled (GTC) order to sell your calls at that price.

Recommended Trade Setup:

-- Buy GE Jun 20 Calls for $5 or less 
-- Set stop-loss at $2.50
-- Set price target at $8 for a potential 60% gain in three months

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This article was originally published on ProfitableTrading.com: My No. 1 Euro Zone Play Could Make You Big Profits by Summer

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.