With the stock market off to a solid start two weeks into the new year and following a string of mostly positive economic reports, investors have warmed up pretty quickly to U.S. equities. This, of course, has been playing out for a couple of months as market pundits and equity strategists developed and announced their predictions for the new year. While we mostly subscribe to the view that U.S. stocks seem well positioned for a decent run in the years ahead, especially as the U.S economy continues to recover and the Europeans slowly sort out their fiscal mess, we have started to look at European equities as perhaps the best place to hide from the crowd. More specifically, as investors shun the stocks of European companies simply by virtue of their domicile, we think several companies offer compelling investing opportunities for those willing to tune out all the noise.

MarketGrader.com does not yet grade companies listed in European exchanges, so our analysis is mostly limited to those with American Depositary Shares. More specifically we have looked for companies with strong MarketGrader scores, of course, but also with compelling valuations and a significant share of their business generated outside of Europe’s sickest areas in the continent’s indebted south. And those domiciled in countries with their own currencies, and thus monetary policies independent of the ECB, seem to us to offer even greater appeal. Among them we find a handful we’ll be highlighting in this column in coming days. The first one, and perhaps one of our three favorites, is Statoil ASA ADS (NYSE: STO).

Statoil is Norway’s national oil company. It generates 78% of its revenue in Norway, 10% in the U.S. and another 10% across the rest of the world. While Brent crude has traded around $110 a barrel for the better part of the last year, the Norwegian Krone has depreciated by approximately 15% in the last six months against the U.S. dollar, mostly because of the strengthening of U.S. economic indicators, a dynamic that boosts the value of the company’s dollar-based revenues. And as it happens to be, Statoil, with an overall grade of 78.8 (out of 100,) is the highest ranked company among the 18 oil ‘majors’ followed by our system and classified in the Integrated Oil industry. Chevron and Suncor Energy round out the top three in the group.

Statoil’s 12-month trailing net income of $11.4 billion is up 25% from three years ago, which might not seem like a hit-it-out-of-the-park number but considering that in the depths of the global recession two years ago, for the 12-month period ended in September of 2009, the company earned $2.08 billion, the latest results reveal a remarkable comeback as energy demand roared back to life. Of particular importance is the fact that even though capital expenditures have been growing at a year-over-year clip of about 25% in the last four quarters, the company’s free cash flow last quarter almost tripled from the year-earlier period. This helps explain an across the board margin expansion in the last 12 months, with EBITDA margin at an impressive 41.7% and operating margin of 29%.

Statoil’s stock trades at only seven times trailing 12-month earnings despite a two-year EPS growth rate of 134%. Its P/E based on the next 12 month’s earnings estimates is only 9. Furthermore, if the company’s $17.04 billion in cash is subtracted from its valuation, the stock’s trailing P/E would fall to a ridiculously low 5.7.

It’s important too that investors understand the company’s ownership structure, which we think adds to its appeal. The number of shares outstanding has remained virtually unchanged in the last five years, at 3.18 billion, probably as its largest shareholder, the Norwegian government who owns 71% of them, prefers to avoid diluting its stake considering how important the company’s contribution is to national coffers. To put this into perspective, Statoil’s 12-month trailing revenue of $110 billion is the equivalent of 41.5% of Norway’s GDP of $265 billion, according to the IMF’s most recent figures. With such a small float (29%) owned by shareholders other than the government, even a small increase in demand for the stock, such as what would happen once it’s clear that Europe will sort out its current troubles, could drive up the share price pretty quickly. And while at $80 billion in market cap the company’s valuation might seem too high to move to the upside too quickly, at $25 (today’s close) the stock is trading 40% below its pre-Lehman high of $41.68, reached in May of 2008. And yet when the company reports earnings next month February 9th, if the consensus estimate is somewhat close to the reported number, Statoil is expected to have earned $2.67 per share, above the $2.63 earned in fiscal year 2007, right before the financial crisis brought the world economy to a halt. The company’s return on equity, currently at 26.23% is also almost back to the pre-recession level of 28%.

Statoil’s $20.35 billion on total debt, or $3.3 billion in net debt when cash on hand is subtracted, accounts for only one third of its total capital, giving the company ample room to increase its dividend payout which at current levels translates into a yield of 3.9%. And with interest rates at rock-bottom levels and the company’s excellent return on equity and return on invested capital (52.4%) it would be silly not to continue funding exploration and production projects with additional debt. It would also be silly for investors to assume Statoil is simply another European stock to avoid.

Readers that are not yet MarketGrader.com subscribers may view our complete analysis of Statoil by clicking here or by visiting this week’s featured Honor Roll: Large Caps.

Major bank stocks in the U.S. and Europe fell on Wednesday following Moody’s downgrade of Citigroup, Wells Fargo and Bank of America and the FOMC’s announcement of further monetary stimulus measures in the face of a worsening economic outlook. Financials in general fell again yesterday in sync with a global equity sell-off. Investors rightfully fear that in addition to an already-difficult operating environment bank profitability will suffer as a consequence of the Fed’s new ‘operation twist,’ which seeks to flatten the U.S. yield curve by switching its mix of treasury securities increasingly towards longer dated maturities. Additionally the Fed will reinvest the principal it receives from maturing mortgage bonds into additional mortgage securities in hopes of lowering mortgage rates even further below its current historical lows. While it hopes to boost investment and consumption with these moves, the Fed’s actions could also put pressure on bank profitability by squeezing the margin between the short term rates at which they borrow and the longer term rates at which they lend. In addition to this, much uncertainty remains among banks regarding Dodd-Frank rules still being implemented by regulators.

Ongoing bank weakness in the United States is still evident in industry-wide metrics followed by MarketGrader.com, such as average return on assets, currently at 0.43% and a still elevated solvency ratio of 55.6%, which represents banks’ non-performing assets as a percentage of tangible equity plus loan loss reserves. However, despite all the work still ahead for the banking industry in the United States, many banks today are in much better shape than they were three years ago in the throes of the financial crisis as a result of the actions they’ve undertaken during this period. Such actions are beginning to separate a few banks from the pack, putting them in a favorable position to gain market share and rebound strongly when the U.S. economy returns to a path of higher growth. The following three banks are, based on MarketGrader.com’s analysis, the best three major banks in the United States today (JP Morgan Chase, which is highly graded by MarketGrader.com, has been excluded from the report since its business encompasses much more than traditional commercial banking, including wealth management, capital markets and investment banking.)

1. PNC Financial Services Group Inc. (NYSE: PNC)

The highest rated Major Bank in MarketGrader.com, with a grade of 72.4, is Pittsburgh-based PNC Financial Services Group, with $263 billion in assets and a market capitalization of $25.1 billion. Its revenue last quarter fell 10% from a year earlier, mostly attributed to a softening of economic conditions in the U.S., at least from our perspective in which overall bank results reported last quarter seemed to decelerate from higher growth rates in the preceding two years. More importantly, PNC’s trailing 12-month revenue of $16.57 billion was 59% higher than the equivalent period ended three years ago, in the middle of the financial crisis. The bank’s quarterly revenue is now running at an approximate clip of $4 to $4.4 billion, well above the September 2008 trough of $2.3 billion. Trailing 12-month net income is up 150% also in the last three years; naturally a dividend increase has followed these improved results after PNC hiked its payout earlier this year from $0.35 per share from the $0.10 per share to which it had been reduced in 2009 as the company was shoring up its capital base. Still, today’s payout is only a little more than half its pre-crisis payout of $0.66 per share, though the stock yields an attractive 2.9%. The bank’s after-tax payout ratio, on a trailing 12-month basis, is still a very manageable 12.9%.

While the bank’s net interest margin fell last quarter to 4.85% from last year’s 5.18%, the ratio is still solidly ahead of the 4.47% bank average. Net interest margin represents net interest income as a percentage of interest earnings assets. During the 12 months ended last quarter PNC’s return on equity improved to 10.2% from a year earlier while return on assets came in at 1.28%, well ahead the 0.43% industry average calculated by MarketGrader.com. Closely followed capitalization metrics have been improving significantly in recent quarters too. While non-performing assets now account for a still-elevated 20.4% of tangible equity plus loan loss reserves, this ratio fell from 33.2% a year ago, a vast improvement. The bank’s tangible equity ratio, which measures tangible common equity as a percentage of total tangible assets, is very solid at 8.6%. However, one area of concern worth watching closely in coming quarters is PNC’s loan loss reserves level. Today the bank has only $0.06 in loss reserves for every dollar in non-performing assets, a 33% decline from $0.09 a year ago. The bank’s current levels of capital have come at a steep price particularly for long-term holders of the common stock. Today PNC has 50% more common shares outstanding than it did at the end of 2008, right before it started its drive to raise capital. But for new shareholders what matters now is what the bank does with its capital going forward and whether it can capture market share from weaker rivals.

In addition to such adequate capitalization levels, the bank’s operations seem well positioned to absorb the impact that the Fed’s upcoming operations may have on the bank’s profitability. Its total interest expense last quarter represented only 15.6% of total interest income, well below the 43% bank average. The bank currently generates revenue of $0.38 and net income of $0.07 per employee in a 12-month period compared to the averages for Major Banks of $0.30 and $0.01 respectively.

PNC shares look inexpensive, trading at seven times trailing earnings per share and 7.6 times forward full year estimates. At yesterday’s close of $46.74, 28% below the stock’s 52-week high, it is trading also at only three quarters of its book value or 1.16 times tangible book. Yet the bank has $41.06 in tangible equity per share compared to the average bank, which is only $12.67 per share.

MarketGrader.com Overall Grade: 72.4 (Buy)

MarketGrader.com Sentiment Score: 4.1 (Neutral)

2. Wells Fargo & Co. (NYSE: WFC)

MarketGrader.com’s analysis of Wells Fargo reveals a story not unlike that of PNC, illustrated above, but on a much larger scale considering the bank had $1.25 trillion in assets last quarter. While the bank’s growth was anemic in the last year as the U.S. economy slowed down, its overall financial picture is a lot different than it was in 2008. WFC’s revenue fell last quarter by 5% compared to the year-earlier period while, more importantly, trailing 12-month sales of $90.87 billion were 64% higher than the equivalent period ended in mid-2008. The bank did, of course, absorb all of Wachovia during this period, which accounted for a significant portion of this growth. Based on recent results it’s clear management has been very successful in integrating both bank’s operations profitably and efficiently. While the bank’s net income jumped 29% last quarter from Q2 2010, it increased almost 96% in a three-year period for the 12 months ended in June to $14.46 billion. This allowed the bank to increase its dividend earlier this year to $0.12 per share from $0.05 per share. While this will translate, on a full-year basis, into a 70% increase, it is still well below the bank’s pre-crisis payout of $0.34 per share.

Wednesday’s downgrade of the bank’s debt by Moody’s was, in large part, attributed by the rating agency to its perception that the U.S. government could indeed let a major bank fail should it run into trouble again, which we doubt. Call this the end of the ‘Geithner Put’ if you will, the fact is that Wells Fargo today finds itself in a very different capital position than in 2008-09. In this time frame its tangible common equity has increased almost six-fold to $73.89 billion from a low of $12.51 billion in the third quarter of 2008 while in the same period assets have only increased by a factor of two, including the addition of Wachovia. This translates into a tangible equity ratio of 6.11%. While better than last year’s 5.57%, the ratio is still too low and investors should look for it to continue climbing, especially considering the bank’s non-performing assets account for 34.7% of its tangible equity plus reserves for loan and asset losses. This is significantly better than the 55.6% bank average and more importantly, lower than the 38.3% reported a year ago last quarter. Clearly the bank still has a lot of work to do, particularly with regards to its capitalization and especially if mortgage loans across the country continue to sour. WFC has today $0.07 in loan loss reserves for every $1 in non-performing assets, half of what it had a year ago and a dangerously low level, particularly if housing prices continue to fall and economic indicators continue to worsen. The bank, however, has done much to shore up its capital base in the last three years. Today it has 60% more common shares outstanding than it had in the summer of 2008, right before Lehman’s collapse. Further dilution of existing shareholders on such a scale, while unlikely, seems like the highest risk for investors in the company’s shares. This makes the company’s ability to continue operating profitably and cover potential losses with earnings from operations over the next 12 to 18 months something investors should follow closely. Fortunately, on the profitability front, the bank’s indicators seem to be pointing in the right direction.

Wells Fargo reported operating results last quarter that translated into a net interest margin of 4.75%, which, although lower than last year’s 5.07%, is still indicative of solid profitability in its core operations and well ahead of the 4.47% bank average. Its trailing 12-month results translate also into a return on equity of 11% and return on assets of 1.16%. In contrast, Bank of America’s return on equity and return on assets over the last four quarters were negative while Citigroup’s were 5.6% and 0.5% respectively. JPMorgan Chase, which we also rate ‘Buy,’ reported last quarter a trailing 12-month return on equity of 10.6% and return on assets of 0.91%. Worth mentioning too, based on Wells Fargo’s latest quarterly results, is the fact that its total interest expense accounted for only 13.8% of total interest income, giving it ample room to continue operating profitably in a flat yield curve environment. The bank generates $0.34 in revenue and $0.05 in net income per employee, well above the industry average for both.

The bank’s shares, trading barely above their 52-week low, are currently valued at only nine and seven times 12-month trailing and forward earnings per share respectively. They trade also at book value or 1.7 tangible book and 1.4 times sales. With a 2% dividend yield, at current levels investors get paid almost 30 basis points more than they would lending to the U.S. Treasury at 10 year rates, while they wait for the dust to settle and the U.S. economy to resume growing at a normal rate (2.5% to 4%,) which undoubtedly it will. When it does Wells Fargo seems well positioned to rebound nicely along with it.

MarketGrader.com Overall Grade: 68.4 (Buy)

MarketGrader.com Sentiment Score: 4.4 (Neutral)

3. U.S. Bancorp (NYSE: USB)

Minneapolis-based U.S. Bancorp had $308 billion in assets last quarter, slightly above PNC’s $262 billion and only a quarter of WFC’s $1.25 trillion. The bank has a market capitalization of $44 billion.

While its net income jumped 36% last quarter to $1.2 billion, its revenue was almost flat at $5.27 billion relative to the year-earlier period. It has taken the bank a full three years to return to its pre-Lehman revenue and net income levels, underscoring the impact that the financial crisis had on its business. USB’s trailing 12-month revenue and net income of $20.89 billion and $4.11 billion respectively are virtually unchanged from the 12 months ended in June 2008. However, its capital base is vastly improved.

USB’s $17.63 billion in tangible equity represents 5.71% of its tangible assets, an improvement from 5.5% a year ago and an adequate level of capital. In contrast, its tangible equity ratio at the end of 2008 was 3.0%. Its non-performing assets fell significantly last quarter relative to its tangible equity plus its reserves for loan and asset losses to 28.3% from 45.5% a year ago. However, so have its reserves, which last quarter accounted for 11% of non-performing assets compared to 14% a year ago. This doesn’t necessarily translate into an erosion of the bank’s loss reserves but could mean, instead, that management thinks the worst in asset write-downs is behind them rather than ahead. Nevertheless, further deterioration of the bank’s balance sheet could force it to put aside in reserves more than anticipated if current levels of profitability cannot be sustained in a deteriorating economic environment.

Last quarter USB recorded a healthy 4.79% net interest margin, albeit lower than last year’s 5.2%, with interest expenses accounting for 20% of interest income, trademarks both of an efficient operation. On a trailing 12-month basis the bank’s return on equity was a very solid 13.4% while its return on assets was also a strong 1.34%. USB generates $0.32 in revenue and $0.06 in net income per employee, both well above the Major Bank industry average.

The bank’s shares, trading 20% below their 52-week high, yield 2.2%, based on a per share payout of $0.125, more than double the payout of the last two years but well below the $0.425 it used to pay in 2008. The stock is valued at 11 times trailing earnings per share and 8.8 times next year’s consensus estimate. It trades also at 1.5 times book or 2.5 times tangible book value. With only 10.9% more common shares outstanding than it had in June 2008, USB has diluted its equity base the least among the large banks that were recapitalized following the financial crisis. This speaks volumes of management’s regard for its shareholders.

MarketGrader.com Overall Grade: 61.7 (Buy)

MarketGrader.com Sentiment Score: 6.2 (Neutral)