I spent some time this weekend with some friends who asked if my small-cap focus is intentional and that if I consider myself to be a small-cap investor. In practice, I do not style box myself like that -- and think anyone who does is missing the point of being a value investor.
I buy whatever is cheap no matter what the size of the company. I pointed out that while most of the real values I am finding right now are smaller companies -- far away from the crowd of ETF traders and the high frequency set -- there were also some cheap large-caps around. This becomes more true if you open yourself to the world outside of the U.S.
I have talked about some of them in the past and I already own many of the world's cheapest large cap stocks. I usually have my sanity questioned when I own stocks like Cliffs Natural Resources (CLF) at 60% of tangible book value or Arcelor Mittal (MT) at 50%. but I am pretty confident that I will be rewarded in the long run. The ride may be bumpy, but as long as the road goes higher over time, then I am comfortable owning them. If the economy never recovers to the point that steel and iron ore prices never improve the value of my stock portfolio will be the least of my concerns!
The same mental health questions arose when I picked up a few shares of Korea Electric Power (KEP) when the war drums were sounding across the peninsula. But I do not think North Korea can economically or politically afford a war with its southern neighbor and South Korea's growth should push the shares higher. As the stock is trading at 40% of tangible book value, I am happy to own the stock.
I have found some stocks that are still cheap enough to consider as long-term investments among larger stocks. Here at home, CNO Financial (CNO) is a $3 billion company whose shares are trading at just 70% of tangible book value. The company sells life and health insurance for seniors and middle income America through its Bankers Life, Colonial Penn and Washington National insurance companies. It may not be the classiest business in the world (it uses a lot of telemarketing, direct mail and late-night television to advertise its services) but it is a pretty profitable one of late.
The company is showing decent revenue and profit growth. Standard and Poor's recently upgraded debt issues by and the company's balance sheet is in decent shape. They are buying back stock below book value and they pay out a small dividend as well.
I own a few European banks on the list, including Royal Bank of Scotland (RBS) and Bank of Ireland (IRE) and have done pretty well with them. I have not added shares of Commerzbank (CRZBY) yet, but I will do so on the next hiccup out of the old world. The $5 billion German bank trades at just 30% of tangible book and is below my threshold of 40% of tangible book for troubled banks. The bank has its problems but it is slowly disposing or running off troubling assets, cutting staff and continuing to digest the five-year-old acquisition of Dresdner Bank. Commerz is the second largest bank in the strongest economy in Europe and, although it may take an extended period of time, these shares should recover over the next five years.
I am applying the same logic to shares of Societe Generale SA (SCGLY). Shares of the French bank have recovered nicely in the past year but they still trade at just 50% of tangible book value. The problems in the French economy are fairly well known and it will take a long time for this bank to fully recover. But I am confident it will get there, given enough time.
The bank reported a strong quarter recently with solid earnings and continued credit improvement. The next time we get a euro-shock market, it will be make sense to establish a small position in shares of the bank. Societe Generale has been around since 1864 and survived worse than a left leaning government in the past 147 years.
Cheap large-cap stocks are thinner on the ground than they were, but they still exist. I care more about the evaluation that the market cap. But if your preference is to own larger companies, you can still find a few stocks to add to your portfolio.