It has been a wild week in the markets and in the world. The Ebola scare is dominating headlines, and to my surprise, even influencing trading activity. The continued economic weakness, particularly out of Europe, has started chatter of an extended period of low interest rates. Oil prices have continued to fall, sparking some feuding at OPEC over production cuts.
We are starting to get a flood of earnings reports, with a couple of notable misses so far. It has been a great week to be a commentator or reporter covering the markets, but perhaps not as much fun for some participants, as volatility has exploded and we have seen some strong selling for the first time in in several months.
The only thing that makes sense, as we head into the weekend, is to put my head down, ignore and the silliness and predictions, and search for the cheapest stocks in the world. This is an interesting exercise I conduct a few times a year, and it has turned up some profitable ideas over the years. I just run a search for those stocks around the world that are the cheapest around the world and consider the merits of buying a basket of these battered stocks.
Right now, European banks are well-represented on the "cheapest in the world" list. Deutsche Bank (DB) is trading at less than 40% of book value. Societe Generale (SCGLY) changes hands at 48% of book value. Commerzbank (CRZBY) is at just 46% of tangible book value. Next week, we will get the results of the European stress test, and we should see some crazy volatility in the Eurozone banks. I already own some of them, but if you want to make a bet on these banks, the only correct strategy is to buy a little of the cheapest. Be prepared to add to your position if they fare poorly, when the stress test results are released next Sunday.
It will come as no surprise that energy-related names are on the list, including some of my long-term favorites. Swift Energy (SFY) and Hercules Offshore (HERO) both trade at just 30% of book value. Oil below $80 is a huge problem for both of these companies, so you have to believe that prices will stabilize at higher levels to be confident in the future of these companies. I don't think oil will settle at current levels, and I won both of these as long-term bets on the eventual growth in oil demand.
At least one other group thinks Swift is undervalued. Activist investment fund Baker Street Capital has accumulated 9.9% of the company and sent a sharply-worded letter to the company's board this week.
There a lot of mining-related stocks on the list as well, but as a good friend pointed out this week, many of these coal companies are going to take substantial write downs if natural resources price do not improve. This morning, we saw Cliffs Natural Resources (CLF) take a $6-billion write-down as a result of the 40% drop in iron ore prices this year. We are probably going to see the same thing happen with many of the super-cheap coal stocks such as Arch Coal (ACI) and Alpha Natural Resources (ANR), unless coal demand picks up. I own coal and mining stocks, but with the exception of silver miner Coeur Mines (CDR) at 30% of book, I am not really inclined to buy any more just yet.
The continued weakness in the global economy has hit shipping stocks pretty hard as well. Global Ship Lease (GSL), International Shipholding (ISH) and Dry Ships (DRYS) all make the list of "world's cheapest stocks." I am not a big fan of Dry Ships, but I own and would be willing to buy both of the other shippers at current prices. I would favor International Shipholding right now, largely because of its U.S. presence and 5% dividend yield.
A lot of smart and patient investors, including Howard Marx, Wilbur Ross and leading private equity firms, have been making shipping investments in the past year, and I am happy to join them.
Buying a package of the cheapest stocks in the world can work very well, but you must have plenty of time and a strong stomach to invest in this manner. I have both, and I am confident it will work out as well this time as it has in the past.