Finding Value in 2014: Europe

After a nearly 30% rise in the S&P 500 index in 2013, many investors are having a difficult time identifying stocks trading at a good value. As another installment in my Finding Value in 2014 series, I will take a look at Europe to see if the European markets offer investors good value picks.

Diversification
While the S&P 500 index gained nearly 30% in 2013, gains in the S&P Europe 350 were closer to 13%, as investor concerns over Europe continued to weigh. The index in made up of 17 European markets and is often seen as the European equivalent of the S&P 500. The S&P 500 has the widely traded SPDR S&P 500 ETF , and investors looking for similar broad-based exposure to European markets should take a look at the iShares Europe ETF . The iShares Europe ETF tries to track the S&P Europe 350 and, therefore, offers investors diversified European exposure.

Autos
The European auto market has been hurt by recession, but looks poised to rebound as the economy recovers and the average age of vehicles increases. My top pick in this area is Volkswagen AG as a value play on Europe and the worldwide automotive market.

Volkswagen AG is no longer just the maker of the Beetle and the Microbus. Today's Volkswagen AG is far more than even Volkswagen itself. The automaker also owns Audi, Porsche, Bentley, Seat, and Skoda, allowing it to target luxury buyers traditionally outside the reach of Volkswagen. The automaker also has major opportunities in China, where it has a market share of more than 20%, and is investing billions in new production facilities.

Despite this growth potential, Volkswagen shares continue to have a low valuation, possibly because of the clouds of negativity surrounding the European market. With a forward P/E ratio of less than 10, the market is still offering growth from a quality company at a reasonable price.

Banks
U.S. banks have risen strongly during the past few years and, while I still see particular value in three U.S. financial companies, investors betting on a European recovery may be more interested in European banks.

My first pick here is Barclays Plc , which pays a dividend of 2.1%, and trades at 0.7 times book value. The bank already raised additional capital through a rights issue reducing the risk of further share dilution. Additionally, Barclays trades at less than 10 times forward earnings while having the potential to see strong earnings growth as Europe recovers.

For those wanting to invest deeper in the eurozone, Commerzbank AG offers a higher risk value play. Trading at only half its book value, Commerzbank was hit hard by the European side of the financial crisis, with shares down well over 90% from their pre-recession highs. While shares are unlikely to see these levels again for decades due to massive share dilution, there are possibilities still for further recovery.

Commerzbank is still 17 percent owned by the German government as a result of the bank's bailout during the financial crisis. There are multiple outcomes available for this stake, including Commerzbank repurchasing it, another institution buying it from the government, or the government publicly listing the shares for sale. Once Commerzbank is fully privatised again, it could begin a dividend again, attracting income investors and dividend-only funds.

European value

The rise in the S&P 500 has meant big returns for U.S. investors, but smaller returns for the S&P Europe 350 mean European stocks could still be among the best value picks for your portfolio. The diversified iShares Europe ETF is a great way to capture broad market undervaluation, but other investors may be more interested in targeted picks in the automotive and banking sectors.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

The article Finding Value in 2014: Europe originally appeared on Fool.com.

Alexander MacLennan owns shares of Commerzbank AG (German listed). This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.