The case for Europe

[Spekulatius]

https://investoralmanac.com/wp-content/uploads/2018/09/SWMC_ThoughtPiece_August-Case-for-Europe.pdf

[John Hjorth]

Thank you for sharing this piece, Spekulatius,

 

My overall line of thinking about how to proceed has also been about exactly this. I'm looking forward to the read.

[Spekulatius]

I think the authors make a pretty compelling case that Europe is undervalued vis a vis the HS, with fundamentals almost as good, but the sentiment far worse. I have an easier time finding value stocks in Europe than in the US currently, that’s for sure.

[Spekulatius]

Some European value stocks I am looking at:

 

BASFY: chemical company at a 11x PE. solid balance sheet. largest chemical manufacturer in the world.

 

UBS: Swiss wealth management bank, has trimmed their investment banking business. PE ~9x, P/ tangible book 1.15x

 

LYG: largest British bank with 30% market share. NIM almost 3%. Held back by PPI provisions ( which will be gone next year) and Brexit cinders. PE ~ 9x, 1.1x tangible book

 

SIEGY : diversified industrial, relatively clean balance sheet. PE~13x

[rb]

I'm not disliking Europe. But i find myself asking: Is this true value or is it relative value given that the US is so expensive right now?

[Spekulatius]

I'm not disliking Europe. But i find myself asking: Is this true value or is it relative value given that the US is so expensive right now?

 

The article looks at the relative discount between Europe and the US stocks and suggests that it is as large as it has ever been. So, that’s a relative valuation call. The sticks that I brought up seem cheap in absolute terms especially the finacials. There are reasons why finacials in Europe are cheap , but both LYG and UBS are real franchises too.

[TwoCitiesCapital]

International exposure is killing me this year. Must be about time to buy some more :/ ::shrugs::

[Spekulatius]

International exposure is killing me this year. Must be about time to buy some more :/ ::shrugs::

 

The underperformance probably get worse, if the US market starts to trend down. There is a saying in the financial circles in Germany, that “if Walls Street get’s a cold, Frankfurt gets pneumonia”.

[TwoCitiesCapital]

International exposure is killing me this year. Must be about time to buy some more :/ ::shrugs::

 

The underperformance probably get worse, if the US market starts to trend down. There is a saying in the financial circles in Germany, that “if Walls Street get’s a cold, Frankfurt gets pneumonia”.

 

I don't know - typically I'd agree, but given relative valuations I think it'd be pretty easy to see a scenario where European equities are only down 10-15% while U.S. is down 30+ in the same scenarios. The U.S. is priced for perfection - the rest of the world isn't. Even if the rest of the world is more economically disadvantaged, they're already pricing some of that.

 

I'm not really buying on any economic speculation - just on the fact that relative valuations between the U.S. and really anywhere else have rarely been wider and that the USD also appears to be relatively over-valued to most currencies. Over a multi-year period, I'd expect a tailwind from both, but expect bumps along the way.

[John Hjorth]

Isen't it perhaps about some of your stock picks, TwoCitiesCapital?

 

Please don't get me wrong here - I like many of them, and I think perhaps some of it is temporary for you. Here, for my part it's about your Russian stock picks, where actually the political system in your own home country creates some fuzz and volatility. [i'm not trying to start a political discussion here.]

 

- - - o 0 o - - -

 

Ref. the starting post in this topic by Spekulatius, I took a dive into the website of S. W. Mitchell Capital some time ago after Spekulatius started the topic. Quite interesting stuff there to read for inspiration to European stock picks. The firm appears quite open about what they actually invest in, in their letters for both their funds and separate managed accounts. The investment style appear to be value combined with GARP/growth.

[Ulrich]

There is a big Gap in Oil Stocks between Europe and the US.

 

Take ENI S.p.a. . An Oil Major, that is more focused on E&P. Not so strong in Downstream like Exxon or Shell. But it trades for under 5 times EV/EVITDA and with higher Oilprices this year the valuation is very attractive.

 

It has low leverage , good growth in Production and i think over 7 million in proofed Barrels.

 

Cons: Reserves often in more unstable countries (Lybia for example), controlled by the Italian state. Dividendtax in Italy.

 

But ist not a state piggy bank. It has a long history paying dividends. And it created a lot of value since it s IPO in the 90s.

 

But really with that kind of reserves and in an financial strong position that would be worth much more on an US Exchange.

[kab60]

I always feel I'm on the wrong side of those relative valuation studies... I think they're basically useless when you're a small guy or fund and do bottom up analysis. I'm from Europa, but I always struggle to find something worthwhile around here. My problem is usually around capital allocation. I'm probably evolving into a GARPy-kind investor and I'm very much attracted to companies and CEOs with large ownership stakes and a high understanding of how they can take advantage of their own balance sheet and equity when the market price doesn't reflect intrinsic value.

 

I have lots of ideas in the US atm (maybe I'm the bagholder, we'll see) but not so much in Europa. Recently sold Goodwin PLC, which was my only position in Europe. I like how Companies like Alliance Data Services, Spectrum Brands etc. are trying to unlock value by taking advantage of record amounts of dry powder at PE funds and discrepancies in valuations between public and private markets. The thing is, if these companies don't take advantage, it might persist (and thus undervalued for a reason). I have an investment in Hong Kong-based Lion Rock Group which has a really low valuation, extremely attractive ROIC and does M&A opportunistically, but it could create so much value in a heartbeat if it would buy backs its own stock in large amount as well.

 

It already has a pretty good TSR, pays a hefty dividend, so I think it'll compound alright, but that one insight of buying ones own shares, when they're dirt cheap, is so simple yet extremely valuable (just look at a Company like Autozone).

 

Some Canadian companies also look attractive but less so since buyback restrictions makes it really difficult to buyback aggressively. I think Turtle Creek wrote something about that not so long ago.

 

Also, regarding relative valuation, I think I saw someone point out that a big reason probably was the many American tech companies while a lot of European companies are more industrial (and thus sport a lower PE - probably with good reason). No idea about the data but sounds reasonable. The Danish equity market (I'm from Denmark) has always been frothy, but we also have a lot of highly valuable companies in attractive industries like pharma and medtech with secular tailwinds.

[TwoCitiesCapital]

Isen't it perhaps about some of your stock picks, TwoCitiesCapital?

 

Please don't get me wrong here - I like many of them, and I think perhaps some of it is temporary for you. Here, for my part it's about your Russian stock picks, where actually the political system in your own home country creates some fuzz and volatility. [i'm not trying to start a political discussion here.]

 

- - - o 0 o - - -

 

Ref. the starting post in this topic by Spekulatius, I took a dive into the website of S. W. Mitchell Capital some time ago after Spekulatius started the topic. Quite interesting stuff there to read for inspiration to European stock picks. The firm appears quite open about what they actually invest in, in their letters for both their funds and separate managed accounts. The investment style appear to be value combined with GARP/growth.

 

Not entirely. Sberbank is down 40-50% in dollar terms, but Lukoil and Gazprom are actually doing just fine this year and I turbo-charged those returns by adding to both on the weakness we saw back in April. Russian equities are a drag on my portfolio as a whole, but not really dramatically more so than other country exposures. Emerging markets as a whole have been rough.

 

Overall, across my entire portfolio, I'm down about 8% for the year, so the term "killing me" is a bit exaggerated. TBH, I'm outperforming the MSCI EAFE in $ terms despite the fact that the vast bulk of my portfolio is in international/EM companies that have individually under-performed that index. 

 

Some weakness was to be expected after two back-to-back 20+% years, but still expecting returns to pick back up and close some of the relative valuation gap between the U.S. and the rest of the world.

 

[Guest MarkS]

Is anyone looking at Bayer?  The trial court recently ruled in their favor granting them a new trial in the Roundup case brought in California.  I'm thinking this is a positive step in reducing or even eliminating the punitive damages award the jury handed the plaintiff who alleged that he contracted cancer from Roundup use. 

[Spekulatius]

Is anyone looking at Bayer?  The trial court recently ruled in their favor granting them a new trial in the Roundup case brought in California.  I'm thinking this is a positive step in reducing or even eliminating the punitive damages award the jury handed the plaintiff who alleged that he contracted cancer from Roundup use.

 

The law suite is bogus (IMO), but the effects are real. Even without the lawsuits, Bayer vastly overpayed for Monsanto, IMO. German managers like to take over US companies, because US managers get paid much more, so that’s  a way to initiate a rise in compensation. I would rather own BASF which bought some AG assets that Bayer had to despose of because the merger. Those assets weren’t thet cheap either,  it at least the price was fair (13x EBITDA ?).

[Guest MarkS]

Thanks Speculatius,

 

As it turned out the trial court denied the motion for a new trial.  He did reduce the award but still Bayer might be dead money for a long time.  You make a good point about Bayer overpaying.  I have put BASF and UBS  on my watch list which included Lloyds, Siemens and Roche.