Mr. Smith goes abroad.

How easily we've forgotten Europe. Last year, with a zooming U.S. stock market and Asia's economic foibles on everyone's mind, the lands of the Eiffel Tower and Buckingham Palace were little more than an afterthought for investors. But while many of us were preoccupied, Marcus Smith, a London-based analyst for the mutual fund company MFS Investment Management, had his eyes fixed on the Continent from Scandinavia down to the Rock of Gibraltar.

In a word, Smith's assessment for 1998 is upbeat. "Right now, as opportunities go, Owl, Europe resembles the U.S. in the 1980s before a lot of the restructuring we saw in the States," says Smith. "Not only are exports up in countries like France, Italy and Germany, but businesses are stream-lining and reorganizing to get ready for the new European currency."

As stock pickers go, Smith is something of a growth traditionalist. He chooses stocks that are raising earnings 12%-20% annually, provided their price-to-earnings ratio (P/E) isn't 20%-30% above their growth rate. He likes companies that have "franchise" value, particularly banks and pharmaceutical companies. "I look for unique products," he says. "Commodity businesses like steel manufacturing always get hit when prices fluctuate. But a company with a strong brand name has more market control and a more faithful clientele." And while Smith looks for companies that are increasing sales at 3%-5%, he admits to having a sweet tooth for restructuring stories. His reason breaks down to simple economics. Companies setting their houses in order often get hit by the stock market, allowing Smith to buy cheap. Then, when they get back on the fast track by boosting efficiency, their stocks rebound nicely.

Twenty-eight when he graduated with an M.B.A. from Wharton in 1994, Smith put in a year at MFS's Boston headquarters before being whisked off to Europe. It was there that Smith found an interesting edge in working with European stocks. Often, a slight difference in accounting standards makes it hard for U.S. investors to get a grasp on a company's books. The painstaking effort of converting foreign stats to comparable U.S. figures helps Smith find gems whose earnings growth is better than what first meets the eye.

One company Smith is high on is the Dutch banking and insurance firm ING Groep N.V. (NYSE: ING). Smith likes the management and thinks several strategic takeovers will keep earnings growth stoked at 15% a year. Convert Dutch accounting figures to American, and ING appears to be selling at a bargain-basement P/E of 13.5 times projected 1998 results, compared with U.S. insurers that now fetch a P/E of 14. Smith sees ING shares rising to the mid-$60s in 12-18 months.

Industrie Natuzzi Spa (NYSE: NTZ), an Italian maker of leather furniture, is another Smith favorite. Natuzzi pieces are commissioned by many large U.S. department store chains, such as Dayton Hudson and Macy's. Smith says Natuzzi furniture is so popular, the company had an order backlog of 20 weeks last fall. Although Natuzzi had to pay a lot of overtime to catch up, the company is now ready for the boom in demand, Smith says, and should see earnings grow 20%-22% this year, followed by 15% annually for the long term. The shares currently are cheap in comparison to their growth rate, trading at a P/E of 16 times estimated 1998 earnings. According to Smith, the stock could reach over $30 a share in the next year or so. "This is one to tuck away," he says.

Although Europe's telephone companies face increasing competition, Smith thinks Telecom Italia Spa (NYSE: TI) can more than weather the onslaught. "The company has the world's largest cellular franchise, and TI has seen its mobile phone business grow 60% in each of the last three years," he says. Smith thinks TI can grow earnings at a 14% average annual rate over the next five years, and by converting Italian accounting figures to U.S. numbers, the stock seems priced at a bargain P/E of 13. Smith sees the stock rising to the mid-$80s in the next 12-18 months.

He's also bullish on another telephone company, Portugal Telecom SA (NYSE: PT). Portugal's developing market keeps demand for phones skyrocketing, propelling PT's growth to among the fastest in Europe. That alone should help PT grow earnings 25% yearly, Smith says, even though the stock is trading at only 18 times projected 1998 earnings. He feels the stock could get to the low $60s.

Finally, Smith's keen on Allied Irish Banks (NYSE: AIB). Ireland's economy is growing a whopping 10% a year, which has boosted AIB's loan growth to 15%-20% annually. Meanwhile, several key banking acquisitions in the U.S. market should help Allied Irish grow earnings 13%-15% this year, and 15%-20% in 1999. The stock's cheap, trading at a P/E of 14 times 1998 earnings at a time when U.S. banks fetch multiples of 17-20. Smith's conservative price target is $75 a share in the next 12-18 months.

PARLEZ-VOUS P/E?
                                                Est. 5-Year
Stock                                              Annual
(Exchange: Symbol)                 Price(*)      EPS Growth     P/E

ING Groep (NYSE: ING)               $52.13         15%          13.5
Industrie Natuzzi (NYSE: NTZ)        25.06         15           16.0
Telecom Italia (NYSE: TI)            68.56         14           13.0
Portugal Telecom (NYSE: PT)          52.94         25           18.0
Allied Irish Banks (NYSE:AIB)        75.75         15           14.0