The overwhelming suspicion coming out of Europe is that somehow the economy is in economic free-fall. The weak unemployment figures that were provided by Eurostat helped to spark fears of a sell-off. Eurostat reported a unemployment rate of 12.2% in April, which was slightly up from the 12.1% unemployment rate in March.
The Dow Jones Industrial Average has sold off, with a 1.36% decline on the session. The decline in American stocks should be temporary.
My take on the European economy
Source: Ycharts
The broader European economy continues to recover, and that should give investors enough room to breathe something of a sigh of relief. Some economies are flat-lining, with Portugal showing a rapid decline in economic activity. However, the remaining countries seem to be doing fine. Rising unemployment in the European Union will most likely persist. As a result, it is highly likely that the European Central Bank will continue to pump liquidity into the economy. Rising unemployment is generally a lagging indicator, but because it is lagging, you shouldn’t let it affect your behavior by too much.
Friday’s EU unemployment figure triggered a rally in the dollar, an increase in bond values, paired with a minor decline in stocks. In periods of volatility this tends to happen, but given enough time investors will sell bonds in favor of riskier assets like stocks.
Buy the dip
Anyone who bought the dip over the past five years has done just outstanding. If I were to choose three stocks to buy I would choose Apple Inc. (NASDAQ:AAPL), American International Group Inc (NYSE:AIG), and Ford Motor Company (NYSE:F). All three companies are likely to grow earnings in a sustainable manner without being priced too far out of reach.
Go with Apple
Apple Inc. (NASDAQ:AAPL) is focusing heavily on the Asian Pacific market. Apple provides a fully complete product experience with a product ecosystem that’s strong enough to fend off the competition. I can only imagine Apple Inc. (NASDAQ:AAPL) winning the hearts of foreign consumers as Apple products are so easy to use and navigate through.
Apple plans on selling low priced versions of its iPhones in foreign markets in order to capture a larger percentage of global market share. Domestically, though, Apple seems to be doing just fine–after all it did gain 2.7% market share, according to ComScore. The gain in market share proves that when given enough time, Apple Inc. (NASDAQ:AAPL) knows how to win the hearts of consumers better than an army of other equipment manufacturers can. That being the case, I believe that Apple will win the hearts of customers internationally as well.
Apple Inc. (NASDAQ:AAPL) trades at a 10.7 earnings multiple, paired with a 2.7% dividend yield. Demand for iPads and iPhones is projected to grow exponentially. Analysts on a consensus basis project 20.88% earnings growth on average over the next 5 years.
To sum it all up, Apple Inc. (NASDAQ:AAPL) pays a bigger dividend than Uncle Sam, grows faster than a corn crop, and is on sale.
Don’t ignore the world’s largest insurer
American International Group Inc (NYSE:AIG) is the second most held insurance company in hedge fund investor’s portfolios. Much of this has to do with the fact that the company has a ridiculous amount of assets on its balance sheet, giving investors a humongous margin of safety. The stock has also been able to grow earnings and beat analyst estimates consistently.
Demand for durable goods has been on the rise. More people are buying cars and homes, which means more revenue when you’re an insurance company on the size and scale of American International Group Inc (NYSE:AIG). Analysts on a consensus basis anticipate this company to grow earnings by 12.20% on average over the next 5 years. American International Group Inc (NYSE:AIG) trades at a 11.4 earnings multiple, keeping it cheap relative to future growth.
Ford remains hot
Ford Motor Company (NYSE:F) has done an admirable job of getting itself out of a ditch. The automotive industry has gotten a lot of negative political backlash during the elections. But somehow Ford Motor Company (NYSE:F) has made it out of the recession with a strong balance sheet and without needing to ask the government for a bailout. In addition to that, Ford Motor Company (NYSE:F) has been adding jobs to its production lines in the United States while growing its automotive presence in overseas markets. It also helps that Ford has been able to design more attractive looking cars while cutting down on the number of brands to just Ford and Lincoln.
Ford Motor Company (NYSE:F) offers investors a compelling 2.52% dividend yield while trading at a 10.6 earnings multiple. Analysts on a consensus basis project Ford to grow its earnings by 11.9% on average over the next 5-year.
Conclusion
It is time to buy stock trading at a fairly reasonable valuation, with a healthy balance sheet, along with reasonable rates of projected growth. Selling stocks because of unemployment in Europe is foolish over the long haul. The fundamentals always matter the most.
The article Buy In May and Go Away originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends American International Group (NYSE:AIG), Apple, and Ford. The Motley Fool owns shares of American International Group, Apple, and Ford and has the following options: Long Jan 2014 $25 Calls on American International Group. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
