As I continue to track the moves of private-equity investors, I've noticed that they moved into Europe in the first part of 2014. KKR (KKR) has been raising money for its fourth European fund recently, and Carlisle (CG) and Apollo (APO) have both been active in the Old World in 2014.
In a recent press conference, Henry Kravis told investors that he was looking at assets in Spanish real estate and financial services, and that he was still actively looking to invest in other parts of Europe. He said, "We are not in any way writing off Europe. In fact, we are putting money to work there." At the Milken Conference earlier this year, Leon Black of Apollo said, "Europe is a place where we are very, very active. There are interesting things to do."
I also find it interesting that this move to Europe goes beyond private-equity firms. Deep-value and distressed-securities investors such as Avenue Capital, Oaktree Capital, Seth Klarman and Wilbur Ross have become active in the European markets in recent months, as well.
Many of these investors are looking to buy assets being sold as the banking system de-risks and de-leverages its balance sheets in front of the eurozone stress test this fall. This is very similar to what we saw in 2010 and 2011, when U.S. banks shoveled assets off the book at bargain prices just to have them gone from the portfolio. Others, such as Mr. Ross, are buying shares of the financials themselves. Many of these banks have been pushed to bargain levels thanks to the looming stress tests, U.S. fines for trading practices and the weak European economy.
Eurozone bank stocks are cheap enough that long-term value types will need to start considering increasing their exposure to the sector. It will probably be a very bumpy ride, as many of my deep-value picks are. But, over time, many of these banks will trade a lot higher. Although I am not a big fan of government intervention, I have very little doubt that the European Central Bank will do whatever it takes to keep the European banks from trashing the struggling recovery.
As was the case in the U.S., we'll see some asset sales and some capital raisings that will cause a great deal of tumult and volatility before the sector finally turns higher. If you buy a small basket of cheap European bank shares, you can use this volatility as an opportunity to scale into positons over the long term.
The discount to book value at these banks is becoming compelling. Deutsche Bank (DB) is trading at just 60% of tangible book value at the current price. Barclays (BCS) shares trade at 70% of book value at the current price. Societe Generale (SCGLY) is also at 60% of book value right now, and Credit Agricole (CRARY) is at 70% of book. These stocks may well go down before they recover and move higher. But I suspect that, five to seven years from now, the majority of eurozone banks will trade at much higher levels than today's prices.
There are some book-value bargains outside of the banking sector, as well. Italian furniture manufacturer Natuzzi (NTZ) is trading at just 50% of book value. Natuzzi has restructured its Italian operations, cut some costs and increased its international presence in its efforts to get back on track. It will need some global economic strength in order to get back to where it wants to be, but the stock could easily double, or rise even higher than that, over the next five years.
ArcelorMittal (MT) shares, as well, are still trading for less than 70% of book value at the current price. The integrated steel company may not recover overnight, but there some signs that the steel business is slowly but surely getting better. Among stocks that stand to benefit from a long-term global economic recovery, this could be the single best name to own. Founder and CEO Lakshmi Mittal certainly hopes so, as he and his family own almost 40% of the shares.
So, in short, the private-equity money is snooping around Europe in search of long-term bargains that they can sell at much higher prices in five or six years. The distressed and deep-value funds are looking for mispriced assets that they can buy in hopes of earnings multiples of the current price, as well. When the smart and patient money is looking at a sector or region, it usually make sense for individual investors to join then in kicking over rocks in search of bargains. Going for Europe is an excellent example of following the smart money into bargain situations.