The fact that is has been 25 years this week since I started in the brokerage business and engaged in the trading of stocks and bonds full time has me reflecting on the changes since that time. It is a completely different world than the one I entered all those years ago. The explosion of mutual funds, weird and deadly structured products, exchange-traded funds, hedge funds and other investment vehicles is stunning in retrospect. The focus has gone away from individual stock and bond selection to something called asset allocation and management, which was the biggest reason I struck out on my own. I am a "dinosaur" of the highest order, and I prefer picking stocks and bonds to all this other newfangled stuff. It would probably be more profitable for most investors to revert to being "dinosaurs" as well.
When I was a young broker, one of the more exotic activities we engaged in was trading foreign stocks and bonds. No one was doing much of this except via mutual fund or Unit Investment Trust. Today, of course, trading in foreign securities is as easy as trading in domestic names, and you'll see few portfolios that do not have some foreign exposure. Markets are more correlated today, but one can still find profit potential in foreign lands undergoing current financial and economic difficulties.
With that in mind, I looked for common sense stocks outside the U.S. for opportunistic, long-term investors. I used the same criteria as I did for domestic companies and screened for a strong history of book value and dividend growth. Then I applied the Graham calculation of price-to-book ratio multiplied by price-to-earnings ratio and selected those with a result of less than 22.5.
One of the first names on the list is a double-dipper of the most unpopular market sector. Vale SA (VALE) not only digs stuff out of the ground as a miner of iron ore and nickel, it is also in Brazil. Everything that comes out of the ground has been punished in the market lately, especially iron ore. Brazil has been struggling to get its economic act together, and the populace has grown restless as conditions have worsened. In a classic case of bad can be good, this may be a stock with a double dose of maximum pessimism and a good candidate for long-term investors.
The Chinese iron ore surplus is being worked off and prices are starting to firm up again. The company is also the world's second-largest producer of nickel, and pricing is improving for that commodity as well. Combined with cost savings taken by management, earnings could take a sharp upward turn and gain Wall Street's enthusiastic acceptance again. Even factoring in the recent dividend cut, Vale has grown dividends by 25% on average the past decade and book value has increased by 35% on average per year. The P/B multiplied by the P/E ratio is less than 11, so the stock is cheap by common sense standards.
Petrobras (PBR) suffers from the same type of concerns. It is also a Brazilian company and although oil prices are moving higher, the company has undertaken a huge capital expenditure program and domestic demand is very weak. Production is down and will probably track sideways until the output of new projects, expected around 2016. In addition, the government owns a controlling stake in the oil and gas company and often sets pricing to fight inflation in the country, and that could hurt margins and earnings in the short term.
While these concerns are valid, the stock market has overreacted to the downside. The PE multiplied by the PB ratio is just 6.16.The price-to-tangible-book-value ratio is just 70%, so the stock is actually, in addition to being a common sense value. Petrobras has grown the dividend by 12% a year while book value has compounded at more than 25%. Brazil will eventually get its economic house in order, and that combined with production for new projects will make this stock an international superstar over the next several years.
Though the brokerage business has changed a lot over the years, the definition of common sense and the characteristics of a winning, long-term investment strategy have remained the same.