British stocks have most upside as Europe tries to stay afloat

One of the most famous stories associated with the Titanic is the orchestra that did not stop playing on the deck of the ship amid the chaos of the great sinking ship. A hundred years after the Titanic went down in the Atlantic, Europe is in danger of sinking.

This threat has existed since the sovereign debt crisis exploded several years ago. European stock markets are facing the second straight quarter of oddly imbalanced performance. In other words, nations such as Germany are performing quite differently than Spain and several others. For example, the Dax advanced 12% in 2012 despite its companies' strong connections to the European business cycle. During the same time period, Spain's Ibex 35 suffered losses of 13.22%.

In the analysts' eyes, two European countries are hoarding blue chip companies, which offer the most attractive fundamentals. France looks good, and England looks better.

The British bastion

Finding European companies that meet buy recommendations and offer potential for gains is a tricky filtering game. Of the entire Stoxx 600, investment bank marketers only recommend buying 16 companies with market capitalization over 10 billion euros.

Of these companies, the most solid recommendation is for the Britain mining company Rio Tinto. After valuing the company at 57.03 euros per share, market consensus estimates that the stock is currently 35% beneath market value based on its 2012 PE ratio of 7.1, which is half of the average PE on the Stoxx 600 (14.8). As a general rule, the lower a company's PE ratio, the more attractive the investment.

Rio Tinto's estimated profit margin for the year is double the Stoxx 600 average, because it is 22.8% compared to the index's 11.83%. Of course, it's necessary to clarify that the investment banks have slashed their net earnings predictions for the year by 13% since January. Predictions are now just 11 billion euros.

Rio Tinto is just the vanguard of the British bastion. Also in the group are BG Group, Glencore and Xstrata (which is in a merger process at this time), BHP Billiton, Vodafone, Royal Dutch Shell and the pharma company Shire. From this handful of companies, another conclusion can be drawn: one of the sectors offering the biggest upside potential is prime materials. Both precious and industrial metals and oil look positive. But Repsol is the only Spanish company with strong ties to the oil industry.