The late Baron Rothschild had a deceptively simple philosophy: “Buy when you hear the cannon. Sell when you hear the violins.” Easier said than done. The old baron had a steady hand and made a fortune during the Napoleonic Wars.

Today, ill winds blow through the most of Europe and the thunder investors hear comes from the policy guns of the European Central Bank and the International Monetary Fund (IMF). Their sights are set on the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). While Greece is, for the most part, dead in the water, Ireland and Portugal neutralized, there may be some value left in Italy, despite the initial broadsides the market has fired at the Italian bourses.

The FTSE MIB (Milano Italia Borsa), the benchmark stock market index for the Italian national stock exchange, is off nearly 17.5% from a peak of around 23,000 in February of this year. The index is also still off more than 50% from its 2007 high of 43,948. Torpedoed like one of Mussolini’s battleships, the FTSE MIB waffles at around 19,000 presently. So please, no whining about the S&P 500 being off 14% from the 2007 peak. It could be a lot worse.

So what’s going on? Like the other southern European nations, Italy is faced with sluggish economic growth, bloated debt, a shaky government led by a scandal-plagued prime minister and all of the other issues that make the Borgias look like Ozzie and Harriet when compared to the dysfunctional family known as the European Union (or disunion). So, naturally, investors are voting their confidence, or lack thereof, in the Italian markets as they have in the Greek, Irish, and Portuguese markets. Unfair? Maybe, maybe not. According to research firm Credit Suisse and Thompson Reuters, there are a handful of reasons why Italy may be in better shape than their PIIGS brethren.

Here are three…

1.    Italy has a lower level of private sector leverage as a percentage of GDP
Bad private sector debt has had a nasty habit of finding its way onto public balance sheets (e.g. governments backstopping/bailing out over-leveraged banks) since the financial crisis of 2008. So far, this hasn’t been a problem in Italy. Private sector debt is roughly 75% of GDP compared with about 200%-plus in Spain and Portugal. The United States is well over 100%. Italy’s position isn’t too bad considering.

2.    Nominal GDP growth is positive 
Consensus estimates for 2011 Italian GDP growth are 2.7%. The IMF has forecast 3.4%, which would be great, but let’s face it: the IMF is in the extreme optimism business. They have to be! Compare that to -1.4% for Greece or -0.2% for Portugal.

3.    Italy is actually running a budget surplus
Strange but true. Italy’s government, according to IMF data, is actually running a surplus of 0.2% of GDP. In fact, it’s the only PIIGS country running a surplus. Spain’s deficit is -4.6% and Ireland’s is a dismal -7.5%.

So, if there’s a chance Italy can avoid the Eurorail train wreck seen in Greece, Ireland and Portugal, then is there opportunity in Italian stocks? Yes. Again, according to research from Thompson Reuters and Credit Suisse, Italian equities are historically cheap on a price-to-book (P/B) basis. Currently, Italian stocks trade, on average, at 70% of their book value. This alone would imply 30% upside as things improve. Incidentally, Italian equities haven’t seen price to book levels this low since the late 1970s and the mid-1990s.

Action To Take–> Two of the bigger, cheaper Italian names that stand out are the ADRs (American Depositary Receipts) of Telecom Italia (NYSE: TI) and integrated energy provider ENI S.P.A (NYSE: E). Telecom Italia trades at about 0.6 times book value. Shares carry a forward price-to-earnings (P/E) ratio of about 7 and yield almost 5%. Eni shares trade right at book value and yield about 4.8%. The forward P/E is about 7 times 2012 estimates.

Owning an exchange-traded fund (ETF) may be a more logical approach. The iShares MSCI Italy Index Fund (NYSE: EWI) holds a basket of Italian stocks in order to mimic the performance of the index. Both ENI and Telecom Italia are in the fund’s top-10 holdings. EWI shares are off 21% from their 52-week high and yield about 3%.

These days, going long peripheral Europe is about as contrarian as you can get. However, 70% of book value is a pretty good discount that could provide some cushion as well as attractive upside.

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