Not long ago we looked at the work of Professor Robert Novy- Marx and his conclusion about combining value and quality. This combined approach to investing has led to extraordinary returns and we looked at some U.S. companies that made the grade as current selections for long-term profits.
This morning I broke out this combination model and went searching for some stocks that qualify as quality-value selections in the rest of the world. As is the case with domestic stocks, there are not a lot of names on the list. There are, however, some interesting ones worth consideration by long-term, value-oriented investors.
ArcelorMittal (MT) has been in my portfolio without really doing much. The company is the world`s leading integrated steel and mining company. The simple truth is that the stock is not going to do much until the world economy stages a real recovery. I have no clue when this will happen but when it does this stock is going to soar.
This was an $80 stock pre-crisis and has made a recovery to just half that level. Even if takes a full decade, that's a rate of return of about 14.5% a year before dividends. Even if the current 1.81% yield never improves, that moves you up to a 16.3% compound rate of return.
The stock trades at about half of book value and gross profits are 53% of total assets. I have no idea when we get a braid-based economic recovery in Europe and the rest of the world. But when we do, I want to already have this stock in my portfolio.
Italcementi SpA (ITALY) has two strikes against it coming out of the blocks. Its major business is cement, and clinker used to mix cement. This is a very economically-sensitive business. If no one is building, you are not going to sell much cement. The company is the fifth-largest cement company in the world and
is trading at just 60% of tangible book value right now. Gross profits are about 28% of total assets, so it just does make our definition of quality. But revenues are at depressed levels, given the current weak market for construction materials. It may take some time for business to get better but this used to be a $30 plus stock. I would not be surprised to see a lot of this ground recovered.
Israeli electronics company Elron Electronic Industries Ltd. (ELRNF) also makes the list of undervalued, quality companies. The Israeli holding company is dedicated to building technology companies, primarily in the field of medical devices. But it has holding in cloud computing companies, retail management and inventory management companies. It also has an online cash register company.
Not only is this a quality company with gross profits that are 72% of total assets, they have a rock solid balance sheet. Elron Electronic earns a Z-score of 5 and has a Piotroski F-score of 6 -- indicating that conditions are improving for the company. Right now the stock is trading at just 88% of tangible book value.
I was delighted to see that one of my long-term holdings made the list. Natuzzi Spa (NTZ) designs, manufactures and sells contemporary and traditional leather and fabric upholstered furniture. The company has struggled for some time, given the weak conditions around the world and difficulties with Italian unions and the government.
The stock sells at 40% of book value and just 150% of net current asset value right now. Gross profits at Natuzzi are 30% of total assets, so it makes the grade as a quality stock. The company has worked to overhaul its business taking measures aimed at solving production delays, and it seems to be slowly working.
In the most recent quarter, Natuzzi was able to reduce its quarterly operating loss by 10.9% and improve its quarterly earnings before interest, taxes, depreciation and amortization by 18.9%.
The combination of quality and value has been proven to work well at identifying cheap stocks with significant recovery potential. The problem around the world is the same issue we found with domestic quality value stocks. The ones we can find look to have enormous potential but there just are not very many of them right now.
It remains a very selective market where it makes sense to hold the stocks you can find, along with a lot of cash.
