Global Value Stocks Buffett, Lynch and Graham Would Like
The Oracle of Omaha
It seems, however, that individual investors aren’t putting their money where their mouths are. Despite the improving sentiment numbers, total inflows to long-term U.S. mutual funds—a good proxy for individual investor behavior— were negative $5.8 billion in the two weeks ending Sept. 15, according to the Investment Company Institute. At the same time, investors were pumping more than $13 billion into the perceived safety of bond funds.
These numbers show just how much fear remains on Wall Street and Main Street. A double-dip recession, tax hikes, a U.S. budget crisis, a European debt contagion —these are just a few of the fears now dogging investors, many of whom are still reeling from the 2008 financial crisis and market crash.
But for good value investors—strategists like Warren Buffett, Benjamin Graham, and other greats upon whom I base my Guru Strategies—times of fear are also times of opportunity. And right now, thanks in part to overblown fears of oncoming disaster, my models are finding opportunities in U.S.-traded shares of companies from all around the globe.
With that in mind, I thought we’d take a look at what my models think are some of the best international value plays right now. To find them, I scoured the country and regional portfolios I track using the Professional feature on Validea.com. Here are some top value picks I found from Europe, India and China.
China Mobile Ltd. (CHL): Based in Hong Kong, China Mobile is China’s largest mobile phone network, having topped the 500-million-subscriber mark last year. The telecom giant has a market cap around $208 billion, and trailing 12-month sales of about $70 billion.
China Mobile is a member of my Validea Professional 10-stock Asia portfolio, which is up 15.8% this year while the MSCI EAFE index is in the red. One of the models that is high on the stock is the approach I base on the writings of James O’Shaughnessy. My O’Shaughnessy-based model targets large companies with strong cash flows and high dividend yields when looking for value stocks. China Mobile’s size, $7.49 in cash flow per share (vs. the market average of $1.13), and 3.5% yield all make the grade.
The model I base on the writings of mutual fund legend Peter Lynch is also high on China Mobile. Lynch famously used the P/E/Growth ratio (which divides a stock’s price/earnings ratio by its earnings per share growth rate) to find good stocks selling on the cheap, and the model I base on his writings likes P/E/Gs below 1.0. When we divide China Mobile’s 12.0 P/E ratio by its 19.9% growth rate (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term growth rate), we get a P/E/G of just 0.6. That indicates the stock is a bargain.
Lynch also liked conservatively financed companies, and with a debt/equity ratio of just 1.86%, China Mobile fits the bill.
Finally, my Warren Buffett-based model also sees a lot to like about CHL. It targets firms with lengthy histories of annual earnings increases, low debt, and high returns on equity. China Mobile has upped EPS in each year of the past decade; its debt is less than one-twentieth its annual earnings; and it has averaged a 23.7% ROE over the past decade, all passing muster with the Buffett-based approach.
Sanofi-Aventis (SNY): Headquartered in Paris with operations in more than 100 countries, Sanofi makes a wide array of drugs, including Allegra (allergies), Ambien CR (a prescription sleeping aid), and Nasacort (a nasal spray). The $87-billion-market-cap firm has taken in more than $42 billion in sales in the past year.
Sanofi is a member of my Validea Professional Europe portfolio. It passes three of my guru-based models, including the one inspired by the writings of the late, great Benjamin Graham. Known as the “Father of Value Investing,” Graham was an extremely conservative investor, and this model likes Sanofi’s strong balance sheet. The firm has a current ratio of 2.4, and its $19.6 billion in net current assets is more than twice its long-term debt ($9.5 billion). The Graham approach also thinks Sanofi’s shares are a bargain—the stock sells for just 10.7 trailing 12-month earnings and 1.24 times book value.
Sanofi also gets approval from my O’Shaughnessy- and Lynch-based models. My O’Shaughnessy value model likes the company’s size, strong cash flow ($4.51 per share, about four times the market mean), and 4.4% dividend yield.
For big, steady-growth “stalwarts” like Sanofi, Lynch adjusted the “G” portion of the P/E/G ratio to include dividend yield. When we factor in its 4.4% yield, Sanofi has a P/E/G of just 0.49, easily coming in under the model’s 1.0 upper limit. That’s a sign that the stock is a bargain at its current price. The Lynch-inspired model also likes that Sanofi’s debt/equity ratio is a manageable 18.3%.
Wipro Limited (WIT): This India-based information/technology firm is another favorite of my Validea Professional Asia portfolio. A big reason: The $35.4-billion-market cap firm gets a perfect 100% score from my Buffett-based model.
Buffett certainly isn’t known for his technology investments, though earlier this year his Berkshire Hathaway (BRK) did take a big new position in computer services firm Fiserv Inc. Wipro, however, has a lot of the fundamental characteristics that my Buffett-based model looks for. The firm has upped EPS in each year of the past decade; it has enough annual earnings ($1.1 billion) that it could pay off its $483 million in debt in less than a year if it so chose, which the Buffett-based model considers exceptional; and it has generated a 26.7% average return on equity over the past ten years, easily topping the model’s 15% target.
I’m long CHL, SNY and WIT.
http://blogs.forbes.com/investor/2010/09/28/global-value-plays-buffett-lynch-and-graham-would-like/?boxes=HomepageII
