Europe: the Fast Track

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The big European economies are stagnant, but if you look around you find some extraordinarysuccess stories. From his base in Prague, Ivo St. Kovachev is finding his share.

If there's money to be made off the powerful force of globalization, somebody like Ivo St. Kovachev ought to be able to make it. The 45-year-old Bulgarian has degrees in technology and business from schools in the Czech Republic and England. He was a Fulbright Scholar in the U.S., speaks five languages and once headed up the foreign investment division of Bulgaria's state privatization agency. He even fitted in a year in Japan, working for the United Nations. Today he's based in the Czech capital, Prague, where he picks stocks for Chicago's Driehaus Capital Management, which he joined in 1996.

Kovachev is one of the three managers of Driehaus International Discovery, a $258 million growth fund that goes after small and medium-size stocks abroad. The other two managers do Asia and emerging markets; Kovachev handles the half of the portfolio invested in Europe.

Among Kovachev's current favorites is Tele2, a fixed-line, Internet and mobile communications outfit based in Stockholm that operates in 22 countries,including Portugal and Russia. Its revenues, $4.8 billion for its latest 12 months, have grown at a 49% annualized clip for the past five years.

The company--not so medium-size anymore--and its shares, listed in the U.S. as American Depositary Receipts, have more than doubled in the past 12 months. They sell for 1.7 times sales and 50 times trailing earnings, versus equivalent multiples of 0.4 and 8.2 for AT&T. Kovachev isn't deterred. "Internet penetration in Europe is on average lower than the U.S.," he says, "so this is a secular growth story, and it should continue to do well."

Like his two colleagues, Kovachev looks for firms with sales and earnings growing at least 15% annually. He aims to find companies where the numbers are improving because of growth in the underlying business rather than because of a cyclical upturn or financial engineering. Other pluses: rising stock prices (So what if you missed the bottom?), steady upward revisions in consensus earnings estimates and a record of beating earnings forecasts. These are the momentum stocks.

Then there are what Kovachev calls "recovery stories," where a firm's numbers look bad on a yearly basis but show quarter-to-quarter improvement. Example: Luxembourg's Gemplus, which makes smart cards. These store information on chips rather than magnetic strips and are widely used in Europe for bank debits, prepaid telecom services and IDs. The technology hasn't taken hold in the U.S., compounding Gemplus' problems of a fiercely competitive European market and the effect of a strong euro on its imported components. For the past four quarters it shows a net loss of $286 million on sales of $885 million. At a recent $5, Gemplus' Nasdaq-listed American Depositary Receipts sell for less than half their 2000 initial offering price.

Kovachev, however, sees a rebound under way, noting that Gemplus posted better than expected results for its most recent quarter. "The downtrend was stopped," he says.

Driehaus InternationalDiscovery has done well over the past five years, with a compound annual return of 27%, compared with 2% for the average overseas-stock fund. It has no sales load but reserves the right to hedge its currency risk (see related column). It has annual expenses of $1.86 per $100 in assets. If you think that you can invest more efficiently on your own (and don't forget the currency risk), consider the stocks listed in the accompanying table.