I had some hopes that we would find more bargain issues worth owning when I started looking globally for safe and cheap stocks. Unfortunately, that simply has not been the case so far. Last night, I ran several screens using measures like the Novy-Marx quality measure and Enterprise Value multiples and I came up pretty much empty-handed.
The dearth of safe and cheap stocks is apparently not limited to the United States. While some friends have suggested that I could find opportunities if I included Russia and China, I am reluctant to do so as even a glance at the current news tells me these folks are not all that friendly toward the U.S. and other Western nations and I feel no need to invest in their countries. That may be shortsighted, but I find the lack of accounting and financial control in both countries worrisome, so I just avoid them. If we ask ourselves the Buffet-Munger-like question before investing, "Do you want to own the business?" most Russian and Chinese companies fall short.
This morning I sat down and looked for financial stocks around the globe that might offer some profit opportunities for long-term investors that can be easily traded in the U.S. market. The first thing I noticed when the list popped up is that South Korean bank stocks are pretty cheap right now. The Korean banks have some issues as problem loans have risen this year, but they are still below year-ago levels.
Moody's reviewed the Korean banking industry lately. "Our stable outlook, unchanged since 2010, reflects our expectation of a stable operating environment for banks in the next 12 to 18 months and strong systemic support," says Sophia Lee, a Moody's vice president and senior analyst. "But we note that banks' asset quality faces tail risks from problematic sectors plagued by overcapacity, although we expect stable asset quality relative to 2014."
Shinhan Financial Group (SHG) is the largest bank by market capitalization in South Korea and the stock is cheap right now. The shares trade at 9x earnings and 65% of book value. The bank is profitable and the shares have a dividend yield of 2.38% at the current price. The bank was the first in Korea, established in 1897, and has grown to over 900 branches and 7,400 ATMs.
KB Financial (KB) is the second-largest bank with over 1,100 branches in South Korea. The bank also has operations in Hong Kong, England, Cambodia and China. The company was formed out of two formerly government-owned banks, and historically its leadership was former government employees, which has been a problem. In the past year, however, there have been changes and current CEO Yoon Jong-kyoo is an experienced banker who has committed to better corporate governance and performance. The stock is cheap right now as it trades at 9x earnings and about 55% of book value. Analysts expect the bank to be profitable again next year as well. The shares yield a little over 2% right now.
Woori Finance (WF) is the smallest by market cap of the big three Korean banks. I have owned this for a year or so and it is still cheap, trading at 11x earnings and 75% of book value. As a bonus, this stock yields about 5%, so you are paid well to wait for good things to happen in the Korean bank stocks.
There is a lot to like about the South Korean banks. They are profitable, cheap and pay dividends. The underlying economy in Korea is pretty solid. They are adding jobs, people are buying homes and consumers are spending at a higher rate than last year. There is some concern about the economic impact of the recent MERS outbreak, but Finance Minister Choi Kyung-hwan said this week, "We will aggressively respond to mitigate the effect of MERS on the economy, including allocating necessary budgeting at the right time." Some observers think MERS concerns could lead to another rate cut and stimulus measures. Any MERS-related selling should be viewed as a buying opportunity for Korean bank stocks, in my opinion.
We are not finding as much as I had hoped as I set out to roam the world for cheap stocks this week, but we have found a few. Tomorrow I will look over the European financials to see if we can find some banks that are in good shape and will benefit from the quantitative easing measures being taken by the ECB to boost the eurozone economy.
