Before we move on from the Ben Graham two-step stock picking model, I decided to take it for a spin around the globe this morning. The investing world has expanded greatly since 1976, and international stocks are a much bigger part of the picture today. Back when Graham wrote the piece, only pioneers and adventurers like John Templeton were investing all over the world, and foreign stocks were quite exotic. Today, it is much more the norm. There are hundreds of foreign issues that trade on the NYSE, and many more in OTC markets.
I used the asset value rather than earnings-based approach for the foreign stocks. I do not trust U.S. accounting numbers, when it comes to earnings, and I am even less confident in earnings from foreign issuers. Earnings are easily manipulated, while assets are usually fairly consistent. I used price-to-book-value instead of price-to-earnings, along with the equity-to-asset ratio, to find some potentially cheap international stocks. This morning, I ran a simple screen looking for stocks that are trading for less than 80% of book value, and have equity-to-asset ratios of more than 50%.
I do not think I am going to surprise anyone when I tell you that energy-related names dominate the list of cheap stocks. The slide in oil has caused the prices of stock like Noble (NE), Ensco (ESV), Pengrowth Energy (PGH), and Gran Tierra Energy (GTE) to collapse to multiyear lows. All of them trade at huge discounts to tangible book value, and the equity-to-asset ratio for all of them is above 50%, so they have decent balance sheets. Recent comments from OPEC ministers lead me to think they are targeting a range of $60 to $65 for oil over the next several months, and we are pretty much there. This is probably a good time for contrarian investors to begin picking up these cheap global energy stocks.
The weak economy and oversupply of many metals and mineral has weighed on the mining sector, and some of our favorite miners are on the list. Teck Resources (TCK), Pan American Silver (PAAS), and Buenaventura (BVN) are all on the list. I have no idea when the economy will pick up enough for the mining sector to move higher, but when it does, these cheap stocks should perform very well.
I own several mineral and silver miners, and I have not yet pulled the trigger on gold stocks. According to our two-factor Graham-based model, they are very cheap. AuRico Gold (AUQ), Iamgold (IAM), Kinross Gold (KCG), and Yamana Gold (AUY) all make the list of cheap and hopefully safe bargain stock.
We started buying shipping stocks back in 2012, and on balance, we have done OK with them. However, the current global weakness has pushed many of them to bargain levels again. Buying those who have high equity-to-asset ratios, and those who are less leveraged than many of their competitors, should turn out to be a winning strategy for long-term asset-based investors. I have a preference for the tankers over dry bulk, so stocks like Ardmore Shipping (ASC), Capital Products Partners (CPLP), and Stealth Gas (GASS) stand out as bargain buys right now.
Brazil is well represented on the list after the post-election selloff, and continued economic uncertainty has weighed on that market. I have had my eye on shares of BrasilAgro (LND) for a long time. The company owns 10 farms with an area of 311,582 hectares of land in Brazil. It engages in agriculture, cattle raising, and forestry related activities. The stock is just above all-time lows, and it is trading at just 73% of book value right now, so it is definitely a cheap stock. The equity-to-asset ratio is 80%, so there appears to be a more-than-adequate margin of safety in the balance sheet. Steel manufacturer Gerdau (GGB) and electric utility COPEL (ELP) also make the list of potential Brazilian bargain stocks.
It is worth noting that energy, mining, and Brazil have been cheap all year, and have just gotten cheaper as the year has moved forward. I have no idea what will turn these markets around, or when it will happen. But I am still pretty confident that five years from now, most of these Graham-based global bargains will trade a lot higher than they are trading today.
