(Updates to add note on Michelin cost cuts.)
NEW YORK (TheStreet) -- JPMorgan expects European countries to get their house in order, boosting some shares by as much as 84% in the next 12 months.
The U.S. investment bank identifies the shares of 30 companies in various industries that are worth buying heading into 2012. Most of the top picks are diversified across countries, though there's a concentration in France and Germany, the most stable in the eurozone.
A portfolio of JPMorgan's top European picks for 2011 would have declined by 11% so far this year, compared with the benchmark Stoxx Europe 600 Index's 12% drop. EADS, a Dutch aerospace and defense company, was the best-performing pick this year, up 25%. Carmaker PSA Peugeot Citroen was the firm's worst selection, down 50%.
Monday was a big day for Europe. France and Germany told the European Union that they must decide if they will accept greater central control over their national budgets. Then Standard & Poor's said it may cut Germany's and France's AAA credit ratings as the agency put 15 euro nations on review for a possible downgrade.
U.S. Treasury Secretary Tim Geithner is currently on a three-day trip to Europe to push European leaders to commit to taking action at the conclusion of their meetings on Thursday and Friday. After a meeting with the French finance minister, he noted he was confident that their efforts would be succeessful.
JPMorgan's European equity strategists say more aggressive intervention in Europe, growing global economies, easing emerging-market monetary policy and strong corporate balance sheets, combined with equity markets that are underowned, provides an opportunity to get involved in select stocks.
The strategists caution that the price of safety, defined as high-quality and defensive growth stocks, is too high right now. As such, they are recommending buying low-quality and value shares. Mislav Matejka, head of European equity strategy at JPMorgan, says: "While it doesn't usually sound appealing to buy 'low-quality' stocks, we note that they trade at extremely cheap valuations at present."
He says the "valuation differential between value and growth is extreme, calling for a reversal of the trade."
What follows are JPMorgan's top five European stock picks for 2012, assuming the companies' shares reach the bank's price targets.
5. Michelin, the French tire maker, also offers travel assistance via maps and digital navigation systems. Nearly 60% of its sales come from emerging markets and the U.S. Besides the geographic diversification, Matejka says: "We also like tire manufacturers, as the sub-sector benefits from a tighter capacity globally and strong pricing power at the time when raw material price inflation is coming down."
The company has also has cut over 1 billion euros in structural costs, which will support higher profit margins.
Michelin's stock is down 11% this year. JPMorgan expects the stock to jump 65% over the next 12 months.
4. Safran is a French aerospace company that supplies engines for commercial aircraft to Airbus and Boeing and makes electronic devices. With about two-thirds of the company's order book coming from emerging markets, notably China, the company hasn't felt the full brunt of the European debt crisis.
Safran's stock is down 16% this year but is up 62% since the start of 2010. JPMorgan expects the stock to climb 70% in the next year.
3. Arkema, also a French company, is a chemical maker with operations in Europe, North America and Asia.
While France faces a potential downgrade of its credit rating, S&P upgraded its outlook on Arkema to "positive" from "stable" last week, with the potential for a one-notch upgrade by the middle of 2012. A strong balance sheet, solid operating income growth, and expansion into fast-growing and more stable markets will support continued growth through 2012.
Arkema's stock is up 2% this year and may rise another 76% during the next 12 months, JPMorgan says.
Bullish investors point to a steep discount in its shares compared with peers. In addition, ArcelorMittal's book value, at $45 billion, is greater than its market value, indicating the stock has room to run. The stock has a lofty dividend yield of 3.9%.
ArrcelorMittal's stock is down 49% so far in 2011, but JPMorgan is predicting an 81% rebound for the next 12 months.
1. Vinci, a French construction and transportation company, maintained record order books in the third quarter. International bookings, up 50%, are more than offsetting zero growth in France.
JPMorgan research analyst Elodi Rall likes the stock because of its resilient profit margins, a strong management team, focused M&A activity, the pipeline of projects and limited debt exposure.
Vinci's stock is down 18% in 2011, while JPMorgan forecasts it will surge 84% over the next 12 months.