How to find discounts of 30% or more
Just weeks before Warren Buffett took part in a $49 billion blockbuster deal in March to merge US food giants Heinz and Kraft, his company signed a much smaller and hardly noticed deal to acquire a German retailer of motorcycle accessories.
“Europe has hundreds of millions of people, high incomes, productive people, so it is a great place to be,” Buffett told the Financial Times. “The US is my first love, but I see terrific possibilities for us in Europe.”
Buffett is not the only investor who is looking past economic challenges in Europe and other parts of the world in search of hidden opportunities. Amid signs that a modest economic recovery may be finally taking hold after years of near stagnation in Europe, investors are uncovering bargains and driving up foreign stock market prices that lagged behind US markets for several years. The Stoxx Europe 600 index, for instance, rose 20% this year through April 15, compared with a 3% gain for the Standard & Poor’s index of 500 US stocks.
To help our readers find global bargains, Bottom Line/Personal turned to Brian McMahon, who comanages a mutual fund that specializes in uncovering hidden opportunities among stocks not just in Europe and the US but in other parts of the world, too.
McMahon told us that he and fund comanager Vinson Walden are finding plenty of attractive companies in unexpected places, including a French cable-TV provider, a Brazilian poultry exporter and a Canadian drug manufacturer.
Their secrets to discovering winning stocks around the globe…
About 50% of our fund’s portfolio now is in foreign stocks rather than US stocks. Part of the attraction is that stock valuations became very low in Europe and Latin America, especially in comparison to US stock valuations. Even certain profitable companies that are increasing their earnings each year have seen their stock prices pulled down so low that any kind of positive news can turn them around.
Unlike in the US, many countries in Europe and other parts of the world are still taking extreme measures to stimulate growth, including cutting interest rates. That helps depress the value of their currencies against the US dollar, which makes foreign exporters more competitive. And many struggling industries abroad are ripe for consolidation, which means larger companies can buy out struggling competitors and position themselves for a strong recovery.
All of this creates attractive opportunities for investors who know how to find them. Hunting for foreign stock bargains can be risky, however, so we stay very disciplined and consistent about what we look for (see below). Our favorite hidden opportunities right now…
ING Group (ING) is a Netherlands-based multinational bank holding company. It has one of Europe’s largest and most cost-efficient consumer deposit bases, totaling more than 400 billion euros. ING is well-spread across Europe, and it has leading positions in the Netherlands, Belgium and Germany. It has nearly completed a significant restructuring that grew out of the global financial crisis of 2008–2009. ING has spun off insurance operations in North America, Asia and Europe, as well as its US-based ING Direct Bank, which was sold to Capital One. ING has seen good success with its branchless direct-banking model in Europe, which it retains. Recent share price: $15.06.
Numericable SFR (NUMCF) owns the largest cable-TV network in France and controls nearly 60% of the country’s market for high-speed Internet service, which is growing rapidly. In addition, Numericable recently acquired wireless provider SFR, which controls almost 30% of the French mobile-phone market. That could boost its earnings substantially because it can offer new customers attractive “quadruple-play” packages that include phone, Internet, TV and wireless services. (In April, France’s antitrust watchdog raided Numericable offices, reportedly over concerns that it might have breached merger rules, but that does not deter us from recommending the stock.) Recent share price: $54.90.
Barratt Developments PLC (BTDPF) is the largest home builder in the UK, where the housing market is still in a strong recovery. Since 2009, Barratt Developments has scooped up more than $6 billion of land at depressed prices for future development. Recent share price: $7.80.
Delphi Automotive (DLPH), based in the UK, was spun off from General Motors in 1999, went through a significant restructuring and now focuses heavily on automotive electronics. The company is well-positioned for profitable growth as one of the leading suppliers of sensors and cameras used in advanced driver-assistance systems, such as a warning system that causes the seats to vibrate when a car begins to drift into another lane. Recent share price: $83.75.
Telecity Group (TLEIY) operates 39 data centers in European cities stretching from London and Stockholm to Milan and Istanbul that store, process and distribute massive amounts of data for other companies. While Europe continues to struggle economically, demand for data centers has soared, driven by cloud technology in which companies and individuals access data remotely over the Internet rather than keeping it on their hard drives. This past February, Telecity announced its intention to merge with one of its competitors, the Dutch company Interxion, in a $2.2 billion deal to form one of the largest data-center companies in the world. Recent share price: $27.95.
BRF (BRFS). Formerly known as Brasil Foods, BRF is Brazil’s largest poultry exporter and the world’s 10th-largest food conglomerate, exporting to more than 110 countries. Although domestic sales have struggled as Brazil’s economy has fallen into recession this year, the company’s exporting business is getting a boost from the weakening Brazilian currency, the real, which dropped nearly 40% against the US dollar over the past two years. It also is benefiting from Russia’s decision to ban imports of certain foods from the US and Europe, and its new processing plant in the United Arab Emirates will manufacture 70,000 tons of kosher and halal meats annually for Middle East countries. Recent share price: $20.71.
Valeant Pharmaceuticals International (VRX), based in Laval, Quebec, offers a diverse portfolio of drugs and over-the-counter products, including Bausch & Lomb eye care, CeraVe skin care and the antidepressant Wellbutrin XL. Its proximity to the US allows it to benefit in visibility and sales here but pay a much lower corporate tax rate in Canada than it would in the US. Instead of spending billions of dollars on research for developing new medications, it buys companies with proven products in promising markets, then improves their earnings by cutting costs and operating them more efficiently. Recent share price: $206.16.
FOREIGN STOCKS: WHAT TO LOOK FOR
We focus on three factors when we are looking for bargain foreign stocks…
A high-quality business. We like companies with solid balance sheets and product brands that dominate their markets.
An undervalued stock. In addition to stocks dragged down by general investor pessimism, we look for companies that have suffered a specific pullback because of short-term problems, such as an earnings shortfall or a management crisis. We want to buy shares at a 30% or greater discount to what we think the business is worth.
Clear catalysts. Just because a stock is inexpensive doesn’t mean that it’s attractive. We also need to see a specific driver that can improve a company’s earnings over the next five years, such as a new product, an acquisition or a dramatic change in its industry.