Date Published 5/17/2012

Hyllandresearch.com

A Highly correlated stock market is a value investors dream.

Recently, The Wall Street Journal published an article showing the increased correlation between stocks. In the article the author says: Thats bad news for investors trying to pick winners and losers among individual stocks.

Although the author may be correct for short-term investors, for long-term value investors a highly correlated market means good companies are being sold off, in addition with the bad ones. The market is, in effect, throwing out the baby with the bath water. This creates an opportunity for an investor to invest in a solid company after it has sold off for no reason. The concern this week was Europe, and Greece in particular. There are plenty of companies that have little to do with Greece or Europe. There are others that may in fact benefit from a weaker Euro when exporting products overseas. Yet these companies are being sold off as well as the market fears what may come from the election results of Greece and its fight against previous austerity measures. There are some uncertainties with companies such as banks, which may be highly leveraged or simply too exposed to Greece. Those types can be avoided It is up to a value investor to identify those companies that are hardly affected by potential problems in Greece, or may benefit from a weaker Euro. Some of the companies that come to mind: Europe based companies:
Ticke r sym bol FTE SAP SI RIO BTI GSK NVS BHP YTD stock performa nce -14% 18% -8.60% 2.30% 5.90% 0% -7.10% -2.60%

Company Name France Telecom SAP Siemens Rio Tinto British American Tobacco GlaxoSmithKline Novartis BHP Billiton

3mo. Stock performance -10% 0% -10.97% -15.64% 2.20% 1.94% -5% -10.74%

EP S 1. 51 2. 45 9. 33 2. 94 5. 01 3. 22 3. 55 8. 49

YoY Net Income change -20.20% 89.80% 57.60% 192.20% 7.50% 222% -6.90% 85.60%

% sales in Europe 34% 21% 53% (1) 12.90% 23% 30.20% 26% 13.30%

Royal Dutch Shell Alcatel Lucent British Petroleum

RDS/ A ALU BP

-9.70% -3.20% -7.23%

-8.50% -31.05% -14.46%

9. 89 0. 36 7. 63 *

53.60% 347.40%

39.90% 29.70% 66.4%(2)

* = in 2010 BP lost 3.7 billion, in 2011 BP made 25.7 billion (1) = includes middle east and africa, company does not break down sales in only europe in 20-F filing with the SEC (2) = includes all "non-U.S." Bp only reports revenue breakdown in U.S and "non-U.S" segments

Not every company in the table should automatically be considered a buy by any means. However, it is interesting to note that a company like Rio Tinto, which does only 12% of its sales in Europe, and has more than doubled its profit from a year ago, would sell off by 15% due to Greece. The same is going on for companies based in the U.S. The market has been beaten up the past month because of the news out of Greece. Greece has a GDP of $300 billion dollars, the S&P 500 has a market cap of about $1.2 trillion dollars. The past month, the S&P is down about 5.5%, largely due to Greece. The 5.5% drop in the S&P has taken about $600 Billion off its market cap, almost twice the total GDP of Greece! There have been some very financially strong companies that have sold off since the news of the Greek financial problems have hit (for the third time now?). For merely one example, look at how North American railroad companies, which have no direct exposure to Europe, have performed over the last month.
Annual EPS (2011) 6.67 5.45 1.67 4.8 YoY EPS %growth 47.30% 18.60% 23.70% 14.30% Stock Performance (1mo) -1.00% -4.10% -6% -0.30%

Stock Union Pacific Norfolk Southern CSX Inc. Canadian National

Ticker UNP NSC CSX CNI

Div. Yield 2.14% 2.84% 2.66% 1.68%

Kansas City So. Canadian Pacific

KCS CP

3.09 1.17

49.30% 10.40%

-11% -1%

1.19% 1.88%

Whether Greece falls off the map or not, North American rails will always have business in the transport of U.S. commodities. Oil companies based in Europe will continue to produce and sell oil to the rest of the world, mining companies will continue to have demand for their products, Europeans will continue to smoke, take medicine and pay their cell phone bill.

As the fear spreads in the market, keep an eye out for deals on quality U.S. and overseas companies.

Hylland Market Research is not responsible for loss of capital due to your investments. Investing involves substantial risks. At the time of writing, the author held no positions in stocks mentioned in the article.