A Yen For The Euro Zone

If it has been a tough year for domestic investors, those who held international stocks have had an even harder time. That's why Debby F. Kuenstner, a member of the three-manager team that runs the $1 billion Putnam International Growth & Income Fund, feels vindicated by her fund's 2.3% decline. Indeed, the average international fund is down more than six times that. The reason the fund is doing better than its peers is simple: The value stocks it specializes in have perked up.

Next year, Kuenstner expects all the stars to align for her fund. "Valuations are more attractive outside the U.S.," she says. Kuenstner is bullish on restructuring efforts in Europe, where 60% of the fund's money is invested. Moreover, the beleaguered euro is strengthening vs. the dollar, which means currency moves should help, rather than hurt, performance.

To determine when a stock is attractive, Kuenstner & Co. rely on Putnam's proprietary rankings. These weigh factors such as a stock's cheapness compared to its home market and the ratio of a company's cash flow to its "enterprise value"--or its equity plus debt. Then, they zero in on prospects with catalysts that can propel their stocks back to a normal valuation. "We like to buy improving companies dirt cheap," she says.

One choice is Rhodia, a French specialty-chemical company. With management cutting costs and demand likely to improve with the world economy, Kuenstner thinks the stock has room to rise by at least 30%. Another pick, Japanese financial services outfit, Aiful Corp., stands to benefit from consolidation among companies that make unsecured loans to consumers.

Kuenstner also believes the market has mis-priced the stocks of British engineering firm Invenys; British conglomerate Granada Compass; and Zurich Financial Services Group, the product of a rocky merger between Swiss and German insurers that Kuenstner thinks is now on track.

Unlike some value pros, Kuenstner says tech stocks haven't fallen enough to qualify as bargains. Two exceptions are British business-to-business software firm Misys, which is expanding its market share, and Dutch giant, Philips Electronics, which Kuenstner thinks has been excessively punished.

Although Kuenstner calls European telecom stocks pricey, she thinks Canada's BCE Inc. is a good value. Wireless giant Vodafone Group PLC is a favorite because it has a big slice of each of its markets. Finally, Kuenstner thinks AstraZeneca PLC will benefit from the successor to its blockbuster ulcer drug Prilosec and a cholesterol-lowering drug in the pipeline.