It has been a while since we traveled abroad looking for undervalued stocks with the potential for outsized returns over the next few years. The pool of U.S.-based companies that are safe and cheap has thinned dramatically this year as the market flirts with all-time highs.
We look every day, but new inventory has been tough to find. I like what we own and have a lovely "watch list" of stocks I want to see move lower, but the bargain bin of non-community bank names here at home is pretty empty. With that in mind, it is time to take the search overseas for some safe and cheap ideas.
My first search is based on famed value investor Walter Schloss. My Schloss-based screen looks for easily traded foreign companies trading below book value and near three-year lows that have strong balance sheets. For my purposes, I exclude both Russia and China as I have an aversion to investing in countries where what I call a "cold and ideological war" exists with the West.
One thing I noticed immediately was that Japanese companies have disappeared entirely from the screen. As the Bank of Japan and Prime Minister Abe have thrown every form of stimulus at the economy, Japanese stocks have rallied sharply, with the iShares MSCI Japan ETF (EWJ) up 15% so far in 2015.
In fact, the lone Asian stock on the list is Taiwan-based United Microelectronics (UMC), a leading global semiconductor foundry that provides advanced technology and manufacturing for applications spanning every major sector of the integrated circuit industry. United Microelectronics has offices in Taiwan, mainland China, Europe, Japan, Korea, Singapore, and the U.S. The company is performing pretty much in line with the global economy and I do not think results will get a lot better until we see worldwide growth move up a few notches.
After the recent pullback, UMC stock is trading at just 80% of book value. With a debt-to-equity ratio of 0.2 and a current ratio of 2.2 the company is strong enough to survive the continued slow environment but I do not expect the stock to be a big performer in the short term.
As has been the case for the past couple of years, there are some shipping names on the list. With the global economy just muddling along I have no idea when the dry-bulk shippers will pick up but I am pretty certain it will happen over the next decade; we know from the past that when the economy does pick up these stocks can fly. In the meantime, however, it might not be much fun to hold them through the swings. Still, it's worthwhile to keep an eye on this group as several are strong enough financially to survive until they thrive. These stocks traded at 4x or 5x the current quote the last time the world's economy was humming along.
My favorite on the current list is Diana Shipping (DSX). The company currently has a fleet consists of 40 dry-bulk vessels. Based in Athens, Greece, Diana operates all over the world. The company is taking advantage of the current market conditions and in its latest update expressed its view that buying ships at this point in the cycle will be a profitable investment as the market gradually strengthens. DSX stock is trading at 40% of book value and the balance sheet is OK, with a debt-to-equity ratio of 0.4 and a current ratio of 3.37.
Mexican steel company Grupo Simec (SIM) was not on the list the last time I ran a global Schloss screen. The company has operations in Mexico and around the world and, like all steel companies, is hampered by a weak global economy. Profits are down this year and analysts expect another decline next year. But over the long run, the company should benefit from improvements in Mexico and the rest of Latin America as well as U.S. infrastructure spending. The stock is trading at 94% of tangible book value and the balance sheet is strong enough for the company to survive until it thrives, with a debt-to-equity ratio of just 0.03 and a current ratio of 3.3.
All of the global Schloss stocks are suffering as a result of a weak world economy. However, some growth will eventually return and patient investors with a private equity mindset could reap large rewards.