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Markets & Finance

Stocks: Big, Cheap, and European

From Standard & Poor's Equity Research

This week, we decided to bait our hook for some really big fish—very large-cap stocks. And we wanted them at attractive valuations. We got what we were looking for, but with a bit of a surprise (more about that later).

Here's how we constructed our screen:

First, because we wanted to make sure these were indeed "mega-cap" names, we limited our pool of candidates to those companies in our database with a market cap of $20 billion or more;

Second, each stock had to trade at a forward price-to-earnings-growth (PEG) multiple below 1 times;

Finally, we wanted to enhance the attractiveness of the names on our list, so we looked for those issues with a dividend yield of 2.2% or above.

When our screen was finished, five names emerged—and all were European.

We asked Alec Young, S&P equity strategist, about the preponderance of European names. He notes that "European stocks overall are pretty cheap historically." Indeed, he points out that the S&P Euro 350 index (including British issues) trades at a 2006 estimated PEG of only 1.2 (based on consensus estimates).

He adds, "Investors are worrying about a cyclical EPS peak globally," due to coordinated monetary policy tightening by central banks, high oil prices, and increasing geopolitical instability. "Risk aversion is therefore rising, and PEGs are contracting," Young says.

FIVE WINNERS?Those shrinking valuations might just add to the appeal of these stocks:

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