Happy Birthday, Sir John

 | Nov 29, 2012 | 4:00 PM EST  | Comments
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Wednesday would have been the 100th birthday of investing legend and philanthropist John Templeton. He built a fortune using an international approach to value investing and offering successful investment products to the general public from his family of mutual funds. I have used his investing ideas and wisdom throughout my career and would be pleased to have a fraction of his long-term success. He was also a generous man who did much to leave the world much better than he found it. I hope I am able to say the same someday.

I am fond of quoting some of Templeton's maxims and use them often in my search for cheap stocks. You cannot outperform the market by doing what everyone else is doing. You need to buy when others sell, and sell when your friends and neighbors are excited buyers. (It is not easy to do this as it goes against you basic instincts.) While buying at the point of maximum pessimism requires great courage, investors will be rewarded with great profits. Last, the search for value should be international in scope to present the greatest number of opportunities.

I sat down this morning and ran a screen of international stocks that trade at steep discounts to book value and were seeing heavy selling. One really quick and obvious takeaway is that shipping is one of the most unloved and potentially distressed industries in the world. I have never well with the shipping stocks, so my advice is suspect, but I have recently stuck a toe in these waters by picking up some shares of Tsakos Energy Navigation (TNP). Naturally, it has moved almost straight down since my purchase, but I like the stock's long-term prospects. I am also kicking over corners of the market and looking at debt and other shipping related securities right now. If the world does not end, the demand for oil and commodities will eventually rise and shippers should recover.

The other obvious point is that solar stocks are in a free-fall around the globe. I have to say I rank these with the education stocks as a group in which I simply have no interest. Without high tax breaks and outright subsidies, the business model for solar just does not work. Add in that China has created stiff price competition for European and U.S. companies in solar cells, and it is just a dead business in my eyes. Sometimes the pessimists are, in fact, correct.

One stock that I think fits the "Templeton Maxim Model" is Centralia Electricas Brasileiras-Electrobas (EBR). The company is Brazil's largest electric utility, but it is being crushed by recent price reductions enacted by the government to spur growth the country struggles to right its weak economy. Analysts estimate that its revenues could decline by as much as 30% next year. The stock dropped 20% in a single day last week and it is down more than 60% so far in 2012. The renewal of some of the company hydroelectric plants is tied to an agreement regarding power rate reductions. After many protested the large cuts, the government said recently that it will review the rate reduction plan.

Brazil has been a huge disappointment to emerging market investors. The Latin American nation was part of the BRIC (Brazil, Russia, India, China) complex and was touted as a driver of global economic growth. It simply has not worked out that way and the Brazilian government is scrambling to get the nation back on track before the world comes to Rio for the 2016 Summer Olympics. The hope is that lowering power rates, as well as interest rates, will help spur economic demand.

If Brazil is unsuccessful in getting the economy back on a growth trajectory, then energy demand and usage will begin to rise again and Electrobas should see a sharp recovery in its share price. This stock is not without obvious political and economic risks, but it priced like an option on a Brazilian recovery and could have a huge asymmetrical payoff for patient investors. Everyone is selling, no one wants to buy and the pessimists are in full control of this stock. It looks like the stock is trading for less than 25% of its tangible book value. In honor of Sir John's birthday, I am going to buy a few shares.

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