Applying Value Principles Overseas

 | Mar 12, 2013 | 12:00 PM EDT
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Today I will continue my discussion of buying what is cheap right now. I am constantly amazed by the amount of effort and time that market pundits put into what is probably the least productive exercise in investing. The amount of brainpower burned up each day trying to predict the direction and duration of market moves is stunning. I have never seen a shred of evidence that this is anything but the flip of a coin. Investors and traders alike would be better off focusing on what has happened rather than attempting to predict the unknowable.

The key is to focus on buying what is cheap right now. Today I want to focus on international stocks that are cheap enough to buy right now, regardless of the various theories and opinions on macroeconomic matters. When applying the basics of asset-based value investing to foreign markets, I stick to the more developed nations. I do not muck around in frontier markets at all, and I avoid all things Chinese. The accounting at Chinese firms cannot be trusted, and I just cannot imagine that a Communist dictatorship that's hostile to the U.S. has my best interests in mind.

The region of the world that is grabbing my attention right now is Latin America. I could go into a long dissertation about population growth, a developing middle class and all the other arguments that one hears, but the simple truth is that I am just finding a lot of cheap stocks in the region. This is especially true in Brazil right now. The government is struggling with the economy and inflationary pressures, and along with the government's own mistakes, this has created some very cheap stocks.

The Brazilian utility stocks are particularly cheap. The government has capped electricity rates in an attempt to spur growth. Centrais Eletricas Brasileiras (EBR), otherwise known as Eletrobras, now trades for less than 20% of book value, and the shares have fallen more than 70% in the past two years. Companhia Paranaense de Energia (ELP) is down about 50% over the same time frame and trades at less than 70% of book value. I have no idea what will turns them around, whether it will be the impending World Cup and Olympics in Brazil or just a change in government policy. I just know that they are cheap and that Brazil will still need electricity in the future. It is highly likely that these stocks improve over the next five to 10 years and reward patient investors.

I turned negative on U.S. homebuilders after they more than doubled in 2012, but I am attracted to the Latin builders. This is not a demographic or economic call, just a recognition that these are viable companies, and they are very cheap. The Brazilian builder Gafisa (GFA) trades at 70% of tangible book value and appears to be at the tail end of a very sluggish couple of years for building in that nation. The company is also looking at selling its high-end Alphaville division for almost $1 billion to pay down debt. The Mexican builder Homex (HXM) is also trading at 70% of book value and is a candidate for inclusion in a new portfolio.

In 2011, we picked over the corpses of several European banks and other financials and garnered significant profits. Right now, in spite of the massive turmoil on the Continent, I do not see a lot that is cheap enough to buy. One exception is Natuzzi (NTZ), the Italian upholstery and furniture company. Business is not great, but it is better than it was, and the shares trade at a discount to the net current assets of the company.

As long as we are in Europe, it makes sense to swing through Luxembourg and pick up shares of the international steel concern ArcelorMittal (MT). Business has been terrible, and the company has had to write down some European assets, and conditions are not likely to improve quickly. However, the stock trades at just 60% of tangible book value, which is cheap for a leading international steel company. ArcelorMittal has cut its dividend and is working to sell assets and pay down debt to de-lever the balance sheet. It may take a while, but the recovery potential for this stock is enormous over time.

I have waged a constant mental struggle over buying shares of Korea Electric Power (KEP). Political tensions on the Korean Peninsula are running high, and when a conflict escalates, power plants are usually the first thing bombed. At the end of the day, I decided to "buy what is cheap and ignore the noise," and I included the shares among my picks for a new portfolio. It is, however, definitely a stock that I would start with a half position, as it is quite likely you will get a chance to add to the stock at lower prices.

This concludes our cheap tour of the planet. Tomorrow we circle back to North America and look at super-cheap energy shares that should be purchased if you don't already own them.

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