Once I finished the new Harper Lee novel yesterday, I turned my attention to seeing if the combination of Novy-Marx quality stocks and low enterprise value-to-EBIT ratios, discussed in Wednesday's column, would work as well overseas as it does here at home.
I ran a few screens and tests and then called Tobias Carlisle for his thoughts on the subject. He hasn't done much work on the Novy-Marx side of the equation but he told me that "The EBIT/EV metric has proven to be a highly predictive measure of undervaluation in the U.S. and developed markets globally." The quality measure appears to hold up in my own testing, so I think this is going to be a valid and profitable way to search for international, high-quality cheap stocks.
I developed and ran the screens on non-U.S. stocks (excluding Russia and China as always) and uncovered some really interesting companies.
One of the top companies on the list was Irish gaming concern King Digital Entertainment (KING). This company made the smash hit Candy Crush series of games that clutter up my Facebook (FB) timeline every day. I am not a fan, but am amazed by how many of my highly intelligent successful friends are constantly sending me invites and posting their scores for what is apparently a very addictive little game.
Wall Street is skeptical on King Digital but at least one analyst likes what he sees. According to Barron's, Morgan Stanley's (MS) Dean Prissman said that he likes the stock based on strong momentum in Candy Crush and the potential for future titles in the series. The company's gross profits over the past 12 months have exceeded total assets and its EV/EBIT ratio is just 5.1. And apparently King Digital thinks its shares are cheap, as it has been actively repurchasing stock, with $109 million of shares bought back in the first quarter alone.
One of the more intriguing companies that turned up was Dubai-based Amira Nature Foods (ANFI). The company sells Basmati rice, which is a premium long-grain rice grown only in certain regions of the Indian sub-continent, under its flagship Amira brand as well as third-party brands. Amira sells its products not only in India but around the world. It has been increasing its presence in the U.S. and recently added Midwestern grocery chain Jewel-Osco to its network. Back in April, the company announced that Costco (COST) would add its products to stores in Arizona, California, Colorado, New Mexico, Nevada and Utah.
Amira started as a family owned trading company back in 1915 and has developed into an international food concern that is growing at a solid pace with the potential to expand much further in the years ahead. Gross profits are 36% of the total assets used to produce the profits and the EV/EBIT ratio is just 5.6. Amira has the potential to be a huge long term growth story and it is worth consideration for long-term investors.
Perion Networks (PERI) is an Israeli company that provides online publishers and app developers advanced technology and various intelligent and data-driven solutions to monetize and promote their application or content. Perion Codefuel is a platform that helps app developers drive traffic and maximize revenue generation, while Grow Mobile is one of the world's leading providers of mobile advertising technology.
Perion also provides consumer apps like free email and a wedding planner app. Gross profits are 90% of total assets and the EV/EBIT ratio is 2.4, making Perion one of the cheapest stocks on our list of quality companies.
The cheapest name on this list is Nevsun Resources (NSU), a Canadian mining company that explores for and mines gold, copper, zinc and silver deposits in Africa. Mining has been a horrible business the past few years but this company is actually producing positive cash flow. Nevsun generated $37 million of operating cash flow in the first quarter and actually reported a profit of $0.06 per share.
Nevsun pays a dividend and the current yield is over 4%. Operating profits were 31% of total assets and the EV/EBIT ratio is just 1.7. A lot of the poor industry conditions would appear to be reflected in the stock price at this price.
Using the combination of gross profitability as a percentage of assets and the EV/EBIT ratio appears to work as well internationally as it does here in the U.S. It certainly uncovered some interesting ideas worth further research and consideration.