Betting the World Won't End

 | May 08, 2012 | 3:00 PM EDT  | Comments
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ire

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mtu

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An exercise I find useful a few times a year is to screen the world to see which stocks are the absolute cheapest on the planet in terms of price-to-book value. This led me to buy Japanese banks in the aftermath of the Fukushima nuclear disaster and select European financials last year after one of the many Greek implosions and explosions. I still hold these stocks and probably will for the better part of the next decade.

Royal Bank of Scotland (RBS), Bank of Ireland (IRE), Mitsubishi UFJ (MTU) and other select global super cheap stocks are a bet that the world is not going to end and that we will continue to muddle through to a widespread recovery in the future. All of these stocks show a modest gain at this point, yet they are still among the cheapest in the world.

This morning, I saw some names on that list that may be of interest to those who expect a global recovery over the next several years. A combination of a weak economy and an unstable neighbor to the north has weighed heavily on the shares of Korea Electric Power (KEP). The company had a horrible year in 2011, losing money due to rising fuel and purchased power during the year. Currency fluctuation also hurt the company as most of its purchased power contracts and a significant portion of its debt are in foreign currencies. Inflation fears kept the company from successfully passing on costs to customers but that should be less of an issue for them in 2012. Korea Electric Power supplies more than 80% of the nation's power needs and should be able to grow steadily with the domestic economy. The company has also entered into overseas operations in recent years as it works toward becoming a major global power generation company. The stock is trading at 30% of book value right now and the risks appear to be priced into the stock price at these levels.

Now trading at a little less than 30% of tangible book value, Centrais Electricas Brasileiras S.A. (EBR) is another utility that makes the list. The Brazilian government owns 54% of this holding company, which itself owns several electric generation, transmission and distribution companies in that nation. The company provides more than half of the total electricity supply in Brazil. Brazilian markets have stumbled in the past year as inflation concerns weighed on the economy. Now the nation's central bank has begun to slowly lower interest rates and the economy and market should be able to resume an upward trajectory. The Brazilian economy is now expected to grow at more than 5% a year and could get an additional boost from the 2016 Olympics in Rio de Janeiro.

The U.S. entries to the global super cheap stocks are Bank of America (BAC) and Citigroup (C). Their troubles are well documented and both are cheap. I have to admit to a bit of intellectual dishonesty in that I have avoided them because of the bailouts and political support they have received. However, my foreign bank holdings have had as much, if not more, financial and political support from their home governments and I have been wrong to avoid Citi in particular. They both trade at 60% of tangible book value right now and if they should fall back below my distressed stock threshold of 50%, then I will need to set aside personal feeling and buy the shares.

I think that the world economy still has a rough ride in front of it for at least a couple of years. Recent European election results are an indication that it could be more volatile and interesting that we first perceived. I do not, however, think that the world is going to end or that the global economy will collapse in smoldering pile of ashes. If I am correct, then investing in the major global banks and utilities at a substantial discount to asset value should be very profitable. If I am wrong, I will have bigger problems than the performance of my stock portfolio.

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