VGK - VGK: European Stocks Gain Steam Remain Inexpensive Heading Into 2024

2023-12-12 13:22:09 ET

Summary

• European stocks have lower price-to-earnings ratios compared to US large caps, and European equities' momentum has improved.
• The Vanguard FTSE Europe ETF is recommended for its compelling valuation, low cost, high liquidity, and improved technicals.
• VGK's portfolio is heavily weighted towards large caps, with a sector composition that differs from the S&P 500.

Global valuations look downright attractive outside the US large caps. While domestic SMIDS trade near 13x next year's earnings estimates, stocks in Europe feature even lower price-to-earnings ratios. Yardeni Research notes that companies within the Economic and Monetary Union of Europe trade at just 11.9x forward earnings. That is more than seven turns lower than the US stock market.

I have a buy rating on the Vanguard FTSE Europe ETF (VGK). I see a compelling valuation, a low cost, high liquidity, and improved technicals with this index fund.

Global Equity Market Valuations: Europe Inexpensive

For background, VGK seeks to track the performance of the FTSE Developed Europe All Cap Index, which measures the investment return of stocks issued by companies located in the major markets of Europe, according to Vanguard . It holds stocks of companies located in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

VGK is a large ETF with more than $23 billion in assets under management, and it pays a dividend yield that is about twice that of the S&P 500 at 3.15%. Share price momentum has improved significantly over the past two months, earning the fund a solid B ETF Grade from Seeking Alpha. With an exceptionally low annual expense ratio of just 0.11%, I assert that VGK is a solid choice for a range of investor time horizons. What's more, VGK has modest risk metrics while its liquidity is high - average daily volume is about 2.7 million shares and Vanguard notes that the ETF's 30-day median bid/ask spread is just two basis points.

Digging into the portfolio, the 4-star, gold-rated ETF by Morningstar is heavily weighted toward large caps. Just 19% of the fund is considered mid-cap and 4% of the allocation is small-cap in size. Morningstar notes that VGK's P/E ratio is just 11.2 as of the end of October. Following a substantial rally since then, I figure that the multiple is closer to 12 today - still a bargain considering long-term earnings growth near 11%, making for a PEG ratio near 1.

VGK: Portfolio & Factor Profiles

VGK's sector composition looks different from that of the S&P 500. The largest weight is Financials at 18% while the growth-focused Information Technology sector is just 7% of VGK, about 20 percentage points lower than the SPX. Additionally, there is single-stock diversification in this ETF since the largest holding, Novo Nordisk A/S (NVO) is less than 3% of the cap-weighted fund, while the top 10 assets make up just 20% of the overall allocation.

VGK: Holdings & Dividend Information

Seasonally, VGK tends to rally into year-end, as is commonly the case with broad equity funds ahead of and through the traditional Santa Claus Rally stretch, according to data from Equity Clock. Following the first two sessions of the near year, though, much of Q1 has historically been a tough period for European equities. So, using prudence when timing entry and exits over the coming months is warranted.

VGK: Bullish Year-End Pattern, Dicey Q1 Trends

The Technical Take

With the CAC 40 and Xetra DAX at or near all-time highs, there has clearly been a significant rebound in stocks from across the pond. Notice in the chart below that VGK scared the bulls earlier this year with a bearish rounded top pattern, key support being in the $55 to $56 zone. Shares held serve, though, and a rapid advance in just the last 7 weeks has helped VGK negate that bullish to bearish reversal signature. Still, I see resistance on the chart in the $64 to $65 area - that was not only the high point for the year but also an important support range from 2021.

But take a look at the RSI momentum oscillator at the top of the graph - it broke from a bearish downtrend a few weeks ago. It's thought that momentum turns before price, so that is a positive sign as we head into 2024. If we take a step back, we see two more important technical features. First, VGK broke its downtrend resistance line off its early 2022 peak about a year ago, helping to reverse the trend. Second, a high amount of volume by price (as seen on the left side of the chart) should offer some support on any near to intermediate-term pullbacks.

Overall, VGK's chart looks healthier today, and key support is seen in the mid-$50s.

VGK: Bearish Rounded Top Pattern Fails, 2023 Highs In Play

The Bottom Line

I have a buy rating on VGK. I like its low valuation and improved momentum. Decent technicals set the stage for a solid 2024.

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