Common Sense Trades Outside the U.S.

 | Jul 18, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

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rfp

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pkx

I want to wrap up the theme of common sense investing today as I ran across a few stocks in my screening efforts that I have not mentioned yet. These are all outside of the United States and seem to be very cheap in spite of a strong operating history.

Opportunities here at home, especially new ones, have become limited as the market has stubbornly refused to go lower in the face of zero interest rate policies. I do not really see anything in the economy, or in the broad market valuations, to justify continued higher prices. The market, however, continues to trade on the Fed and the Fed only. We have gone an extended period of time without a pullback and common sense would seem to dictate we will get one before too much longer.

I have found a few bargains in the Japanese stock market. The Nikkei averages have recovered somewhat from the anti-Abe decline of May and June. The market had a huge run last year as the Japanese administration undertook a broad stimulus and economic recovery plan. Japanese stocks are actually flirting with five-year highs at the moment. However, they are still well below the 10-year highs and many of them are cheap.

One Japanese company that intrigues me is the large conglomerate Mitsui & Company (MITSY). It would be easier to figure out what business they are not engaged in, as they have eight operating divisions. They are involved in metal trading and sales, steel, infrastructure, food, transportation, chemicals, real estate, mortgages, broadcasting, and just about anything else you can imagine.

The $24 billion company has done a solid job of rewarding shareholders by growing book value at 12% and cash dividends declared by 21% annually over the past decade. At today's price the stock is trading at just 80% of tangible book value and appears to be a solid bargain. The price-to-earnings ratio multiplied by the price-to-book value is just 6.4, so it is cheap on a common sense basis as well. The shares trade at about 60% of the 10-year highs and appear to have substantial upside for patient investors.

Prem Watsa of Fairfax Financial Holdings (FRFHF) has been referred to as the Warren Buffet of Canada. That comes as no real surprise since he has grown the book value of the company by more than 23% a year since 1985. Like the sage of Omaha, Watsa owns insurance companies and uses the float and profits to invest in securities and companies that he thinks can grow over time. As an example, he partnered with Wilbur Ross on the Bank of Ireland (IRE) deal and is sitting on huge profits in the transaction.

A look at their portfolio shows large holdings in blue chips like Berkshire Hathaway (BRK.A), Johnson & Johnson (JNJ) as well as a substantial stake in beleaguered smart phone company Blackberry (BBRY).

In keeping with the concept that you can tell how smart someone is by how much he agrees with you,  he has decent positions in some of my favorite like EXCO Resources (XCO) and Resolute Forest Products (RFP). His biggest position is cash with over $7 billion, or 27%, of total assets, held in reserve for future opportunities.

The stock trades at 1.1x book value and just 13x earning, so the common sense number is just 14.3 -- well below the limit of 22.5 established by Ben Graham. I view this stock in much the same common-sense manner as I do Berkshire Hathaway. Buying it in a full blow crash and holding it for the rest of your life is the best way to invest in this company.

Shares of Posco (PKX), the leading Korean steel company, have been weak this year as a flattering global economy and fears of thei antics of their northern neighbor have weighed on the shares. Going into the second half of the year and 2014, we should see rising demand in global steel markets and firming prices. It is also highly likely that there will be consolidation in the industry and that usually raises valuation levels for the surviving entities.

 In spite of tough going over the past several years, management has grown both book value and dividends by 13% over the past decade. Both rates are likely to accelerate in an improving economy. Multiplying the price to book value ratio of .8 by the current price-to-earnings ratio gives us a result of less than 9,--so the shares are cheap at this level.

While I have a preference for buying stocks at a steep discount to tangible book value, adding growth and dividends into the equation just makes sense for most long term investors.

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