Now that the Super Bowl is behind us and the Ravens have emerged victorious, we can move onto more important subjects. It is always a relief when we stop talking about football and move onto truly critical stuff like baseball and the search for cheap stocks. In the aftermath of Friday's article on the cheapest large-cap stocks I became very curious about cheap stocks around the globe. The domestic market has rallied impressively, and there are not a lot of new cheap names around right now. I set my trusty screener to look around the world for names that fit the definition of perfect stocks: profitable, pay dividends and cheap on an asset basis.
Two observations stood out immediately. The list is dominated by Chinese stocks -- nearly 80% of the names are in China or Hong Kong. I have learned my lesson with China. I attempted one last foray into China in 2008 when many of the stocks appeared to be net-nets. After that little venture, I now just assume that all Chinese company financials are fraudulent at worst and unreliable at best. I have come to the conclusion I have no interest in investing directly in a communist dictatorship with little to no financial supervision and no desire to anything but extract capital from my pocket. I may miss a few winners over the years, but I will miss a lot more losers and sleep better at night.
The second observation once outside the Middle Kingdom is that there are not a lot of cheap stocks around the world either. The recent rally has been global in nature it seems and there just are not too many issues that are cheap and can be easily traded in the U.S. I plan to dig into the smaller issues traded on the OTC markets later this week, but that is a much more time consuming task.
There are a few names worth further attention by long-term investors. I have had great experiences investing in ventures managed by Brookfield Asset Management (BAM) over the years and I expect that Brookfield Office Properties Canada (BOXC) to work the same over time. The REIT owns some of the premier properties in our northern neighbor with 28 properties in Vancouver, Calgary, Toronto and Ottawa. With a rate of better than 97%, the company has the highest occupancy rate of all operators in Canada. The average lease still has an average life of 8.6 years and only a little more than 7% comes due annually between now and 2016. The company has used debt very conservatively and has an average loan to value of more than 40% in its portfolio of properties. The shares trade at 90% of tangible book value and yield almost 4% at the current quote.
From the land of my ancestors, we get the Ireland-based Fly Leasing (FLY). I first bought this company when it was still Babcock and Brown Leasing back in 2008. The company is well positioned in the industry, which should see its fundamentals steadily improve along with the global economy over the next decade. In addition, this company has done a fantastic job of managing the fleet and the balance sheet. It has sold 11 aircraft all at a premium to book value and the lease utilization rate for the portfolio was 96%. It has continually refinanced or repurchased debt to lower interest expense and leverage ratios. It has also repurchased almost 25% of the share issued in the initial public offering at an average cost well below the current price. The shares trade at 80% of tangible book value and yield a very comfortable 6.83%.
The list doesn't produce a lot of profitable dividend paying cheap stocks. There are several issues in Argentina that look appealing but I have not yet been able to sort out the political mess in that country. I confess I am tempted as we seem to be near a maximum pessimism point, but I will need to consult with some folks who know Latin America a lot better than I do. The Greek shipping companies are all cheap, but this sector has not been kind to me over my career and for now I am limiting my exposure to Tsakos Energy Navigation (TNP) and sliver of Paragon Shipping (PRGN) -- which are left over from my disastrous investment in 2010.
Looking for cheap stocks outside the U.S. makes sense to me, but it seems the global rally has limited the supply. It also strikes me that global correlations appear very high, so it is not necessarily going to provide a diversification effect for most investors.