1 European Stock I'm Ready to Buy

Despite the turmoil in Europe, there are Europe-based companies that could be good bets right now. There is one in particular that occupies the top spot of my "buy next" list.

Strangely enough, I happened on this overseas stock while shopping right here in the good ol' U.S. of A.

A couple of years ago my wife and I started noticing these funny stores cropping up around us in Las Vegas. As far as we could tell, they were grocery stores, but by size they looked more like glorified gas station convenience stores. After hearing good reviews from a few friends, we decided to wander into one.

For a guy like me, the experience is bliss. The stores are small enough that I can buzz through a shopping trip in record time and still find everything I need. Much appreciated was the fact that this guerrilla grocer cut down on the overabundance present in most stores -- rather than stock 47 different toothpastes, they have maybe four or five solid selections.

But it wasn't just me; my wife was hooked as well. Soon we were driving out of our way, past the nearby Smith's -- a "standard" grocer in the Kroger family -- and Von's -- ditto, but part of the Safeway group -- to do all of our shopping at Fresh and Easy.

From a shopper's perspective, I appreciate that Fresh and Easy is exactly what it says it is -- an easy place to shop with a focus on fresh and organic foods (without the pomp and prices of Whole Foods (NAS: WFM) ). From a business perspective, I really dug the efficiency of the stores and the fact that much of what I found in my cart was high-quality Fresh and Easy brand items (which are higher-margin sales for a grocer).

But the question was: Is there an investment opportunity here?

Yes... but no
Figuring that Fresh and Easy was some small, privately owned start-up (a la Trader Joe's early days) I was surprised to find out that it's owned by the massive U.K. grocer Tesco (OTC: TSCDY.PK). So... invest in Tesco? It wasn't quite that simple.

While the now-cliche Peter Lynch line "buy what you know" can lead investors toward good opportunities, not everything that "you know" will turn out to be a good investment opportunity. In this case, I quickly learned that Fresh and Easy is a very small slice of Tesco's business and, furthermore, it's an unprofitable slice.

I may love Fresh and Easy, but that wasn't enough to invest in the giant Tesco. I tabled the idea.

Along came Buffett... and friends
Tesco was simmering on my investing back burner when I noticed that it had a very notable backer in investing great Warren Buffett. According to the most recent filings, Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) has amassed a near-$2 billion stake, making it Tesco's largest shareholder.

While Buffett has been building that stake for years, he gave the position a big boost earlier this year, jacking up Berkshire's stake from 3.2% of Tesco's outstanding shares to just over 5%. Interestingly, it was right around the same time that I noticed another of my favorite value investors, Tweedy, Browne, start its own position in Tesco.

Tweedy may not have the brand recognition that Buffett does, but the group has a stellar track record as a value investor and was one of the investors that Buffett profiled in his classic "The Superinvestors of Graham-and-Doddsville." In Tweedy's most recent investor update, Tesco was included as one of its three "material new purchases." Of Tesco and the other two (Hays PLC and HSBC) Tweedy noted: "All three of these companies trade at significant discounts from our conservative estimates of intrinsic value and pay an attractive dividend while we wait for value recognition in the market."

Tesco's back on the front burner
I like to keep track of what top investors are buying, but I make it a practice to avoid investing simply because a Buffett or Tweedy is jumping in.

A closer look at Tesco revealed the following:

  • The company has delivered a very solid average return on equity of 17.5% over the past five fiscal years (for comparison, Whole Foods' is closer to 11% and Kroger typically delivers over 20%).

  • It gets the bulk of its business from the U.K., but has solid and growing exposure to Asia, the rest of Europe, and the U.S.

  • The company's balance sheet is reasonably capitalized with debt-to-equity of 66% and EBTIDA debt coverage of more than 12 times.

  • Tesco has been steadily growing its dividend. In the most recent 12-month period, the payout has more than doubled from the same period in 2003 and has an average annual growth rate of 10%.

  • The grocer's huge U.K. business is stalling.

The final point is obviously a big bummer. My U.K. colleague G.A. Chester did a great job laying out why Tesco's problems are good reason to take a pass on the company's shares. A big part of the analysis is that -- not unlike U.S. retail hulk Wal-Mart (NYS: WMT) -- Tesco took its eye off the ball at home while it busied itself growing elsewhere. Now it will have to retrench and spend a significant amount of money to win back customers that have been wooed by competitors.

The flip side is that concern over what's ahead in the near term for Tesco has pushed the valuation down. Tesco's current EBITDA multiple -- the valuation measure we should be using -- is 6.3, which compares favorably to French competitor Carrefour at 10 times and U.S. comparables Wal-Mart, Costco, and Target at 8, 9.9, and 7.4, respectively.

I'm in
Thanks to The Motley Fool's disclosure and trading policy, I'll have to wait before starting my position in Tesco. But between the company's scale and international presence, its attractive shareholder returns, its low-priced stock, and its dividend approaching 5%, I'm adding it to my Motley Fool CAPS portfolio and am ready to pick up shares for my personal portfolio. It also doesn't hurt that I have the opportunity to buy at better prices than both Buffett and Tweedy, Browne.

And what of my beloved Fresh and Easy? That could be frosting on the cake. The subsidiary needs to show that it can scale to profitability -- Tesco recently pulled out of Japan because it couldn't find footing there -- but it's been growing like gangbusters. I don't want to get ahead of myself here, but it's worth pointing out that this "growth market" for Tesco also happens to be the world's largest economy.

More Buffett buys
Maybe you're a fan of Buffett but are not quite taken with Tesco. My fellow Fools have outlined another segment of the market where Buffett has shown significant interest. To dig in, download a free copy of "The Stocks Only the Smartest Investors Are Buying."

At the time thisarticle was published The Motley Fool owns shares of Tesco, Berkshire Hathaway, and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Berkshire Hathaway, Tesco, and Whole Foods Market. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Fool contributor Matt Koppenheffer owns shares of Target, Wal-Mart, and Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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