Finding Cheap Stocks Around the Globe

Finding Cheap Stocks Around the Globe

By NEIL A. MARTIN | MORE ARTICLES BY AUTHOR

Veteran stockpicker W. George Greig sees opportunities in Europe and Asia because the market isn't differentiating between average and superior companies.

 

When Barron's first interviewed portfolio manager W. George Greig in August 2000, he was running William Blair & Co.'s William Blair International Growth fund, a $350 million diversified global-equity product that invests in companies outside the U.S. That strategy clearly paid off: The fund's assets have mushroomed since then, to $3.6 billion.

Over the past three years to Jan 31, the fund (ticker: WBGIX) has generated a 19.13% annualized return, beating the 17.53% posted by its benchmark, the MSCI AC World ex-US Index. That performance put it in the 26th percentile in Morningstar's foreign large-growth fund ranking for that period.

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Bob Stefko for Barron's

"The market isn't paying much for either past success or future potential right now." -- W. George Greig

Greig, a 59-year-old MIT and Wharton School graduate, is now also Blair's global strategist. That makes him a key player in overseeing the roughly $48 billion in assets that the Chicago firm manages. "It's a team effort," he modestly says, referring to Blair's group of sector analysts.

We interviewed the 30-year industry veteran (who has spent half of those years with Blair) on his recent visit to New York. He gave us his views on global markets and why he thinks developed Europe is cheap and emerging markets are promising. For the details, keep reading.

Barron's: The year 2011 was a tough one for the global economy, given the multiple financial and economic crises around the world. What does 2012 look like?

Greig: We're basically optimistic. The damage done to developed and emerging economies and the global financial system by the 2008 financial crisis has receded and left comparatively little after-effects economically. But it did leave its mark, more psychological than real. Economists believe that the global economy will expand by 2% in 2012.

Most economists would characterize 2012 as a subpar year for growth. I wouldn't disagree, but even so, the world economy should show nominal growth of $2 trillion to $3 trillion this year, which is approximately the same as the size of the U.K . economy. That will generate a lot of dynamism, a lot of creative destruction, and a lot of value creation for companies that can take advantage of it. Corporate performance, measured by return on capital, has continued to be strong over the last couple of years, but the market isn't paying much for either past success or future potential right now.

Wall Street has rallied a lot since January. What's the implication for non-U.S. markets?

It is positive. During 2011, both developed and emerging economies experienced bear markets. The misery was spread around pretty evenly. But the rally in U.S. stocks has helped everyone. Foreign markets have responded very well and some have outperformed their U.S. counterparts. Investors can find something to like in many parts of the world, especially developed Europe, emerging Asia―most notably China―and changing Japan.

What's the biggest risk facing investors?

Probably this global experiment in monetary stimulus that G-4 central banks have embarked on. Nobody really knows whether it's inflationary, deflationary or anti-deflationary. The old rules about the relationships between monetary authorities, the financial sector and the real economy become invalid if interest rates are zero. It's a new ball game.

Asset prices are sending mixed messages about the inflation outlook. Commodities are voting for a little inflation, but the output gap [the difference between the actual and potential output of an economy] is still saying deflation.

What's the key to making money now?

It's finding companies that are producing strong corporate performance and strong returns like SAP [SAP], Diageo [DEO], Samsung Electronics [005930.Korea], andRolls-Royce Holdings [RR.U.K.]. Even when we were in a highly inflationary environment 30 years ago, that was the key to making money. It still is today.

Strategically, our approach is very consistent. It is a bottom-up-driven strategy. We look for value-creating companies that earn above-average returns, and we also focus on valuation.

A lot of our country positioning is really the aggregation of the companies we're interested in. For example, the U.K. is a market where we've tended to have a big commitment, but that's largely because of global leaders like Burberry Group[RBY.U.K.] and Rolls-Royce―the heritage is British, but the growth is global.

Are global valuations attractive now?

Yes, very attractive. Valuations have been so compressed that there's not a lot of difference between each sector's valuation and the market's. To me, that means that opportunities to get strong returns out of the best-performing companies are now better than they have been for a long time because the market isn't differentiating between the average company and the superior company.

Where are the better valuations?

In our view, Europe, including the U.K., stands out. Europe is trading at 9.7 times expected fiscal 2013 earnings, which are expected to be up 11%, on average.

This has made some pretty big, well-known names like Royal Dutch Shell[RDSB.U.K.], Sanofi [SNY], BNP Paribas [BNP.France], and BMW [BMW.Germany] very attractive. They trade on single-digit 2013 P/Es of 7.6, 9.4, 6.2 and 8.9, respectively.

What about emerging markets?

There are trade-offs between emerging and developed markets, in terms of growth and stability. Emerging economies obviously provide the growth impetus, but in many cases developed markets provide the products, technologies and brands that enable a lot of that growth. In terms of stock-market valuation, it's a close call―emerging markets are still significantly below their peak valuation levels after the 20% or so correction they had last year.One-and-a-half years ago we were talking about concerns about valuation in a rising-interest-rate environment in emerging markets. But now valuations are much more attractive, and rates are going down, not up.

But Europe is a cheaper and better bet?

We believe that European equities offer the greatest potential and stability. The prices of European equities declined sharply last year but are rebounding this year.

All right, let's talk specifics. What companies do you like in Britain?

Abcam, a British company [ABC.U.K.] is a leading provider of antibodies to research scientists. The firm has a market value of approximately $1 billion and annual sales of £83 million [$132 million]. Abcam has created a successful strategy of using third-party antibody suppliers and creating a massive, interactive catalog of over 50,000 products that incorporates customer feedback into its product descriptions, enhancing the value of each product. This, in turn has the potential to drive future sales growth. It is the second-largest global provider of antibodies, with an estimated 10% share of a fragmented market that is growing in the high single digits.

George Greig's Picks

		Recent
Company	Ticker	Price
Abcam	ABC.UK	341 pence
BMW	BMW.Germany	�9.20
Fast Retailing	9983.Japan	¥17,400
Getinge	GETIB.Sweden	190 kronor
Samsung Elec	005930.Korea	1,180,000 won
Source: Bloomberg

Abcam's stock has recently come under pressure on concerns of research funding cuts as a result of academic and governmental budget pressures. While Abcam has cautioned on these macro-oriented issues, its business―and stock―have been more resilient than [related firms'] because Abcam sells less-expensive consumable products that are used in everyday research, rather than more-expensive equipment that could easily be deferred. In addition, the company continues to increase its catalog product offering at an impressive clip and is expanding beyond its core research-antibody product offering.

Who else do you like in Europe?

We're big fans of luxury German auto maker BMW, which is growing at about double the pace of the auto industry. Its strong-selling products include the BMW 3, 5 and 7 series, as well as the X3 and X5 SUVs. BMW also manufactures the Mini and Rolls-Royce. With estimated global sales of �0 billion [$93.2 billion], this manufacturer has strong operating momentum, supported by a recovery in its traditional markets of Germany and the U.S., as well as continuing and highly profitable growth in China, which is the largest market in the world for the 7 series and X6 crossover vehicle, and the second-largest market for the X3 and X5 models.

BMW's most recent sales reports show robust sales across geography and models with a positive mix effect. Mini sales were at record levels in 2011, and Rolls-Royce sales were up 30%. The European launch of the new 3 series in March, along with continuing trends globally should underpin unit growth nearly twice that of the automobile market as a whole. At a recent price of �9.20 [$91.78], BMW's stock was trading below its July 2011 high. But earnings growth and demand remain strong. At 8.9 times 2013 earnings, the stock's valuation is attractive.

Anyone else in Europe you want to mention?

We hold a Swedish medical-equipment and device manufacturer and supplier by the name of Getinge [GETIB.Sweden], because we look for companies with leadership positions in their industry. Getinge is No. 1 or 2 in 17 of the 19 medical specialties in which it competes. It recently acquired Atrium Medical, a U.S.-based cardiovascular device maker that has grown at a 17% compound annual growth rate over the past eight years. This has helped Getinge improve its business mix by selling more surgical products backed by more intensive research and development. This should help insulate it from potential pricing pressures. The stock is trading near its 52-week high of 193 Swedish kronor [$28.80], but we think there is still room for more growth over the next 12 months.

Do you find China attractive on a valuation basis?

Yes, although historically single-digit P/Es tend to be rare and unusual in a market like China.

Still, you have some concerns, right?

The key concern for the global economy is China's growth prospects, because China has become the single largest source of global growth. If expectations for China are unsustainable, negative consequences for growth in the rest of the world are likely to be more severe and more enduring than those caused by, say, a recession in Europe or the U.S.

The anxiety over China relates to perceptions of overinvestment in general and in real estate in particular. Of further concern is that much of this excessive investment has been fueled by credit―corporate, household and government. On the other hand, we think that China's political leadership values economic stability and has enough means at hand to ensure such an outcome.

About 2.7% of our assets are in Chinese names, with our single largest holding there being the Industrial & Commercial Bank of China [1398.Hong Kong]. That's a small position, compared with our commitment to other areas of the world like the U.K., which accounts for about 23% of our total portfolio assets, or Germany, which represents 8%, or Switzerland, 5%, or France, 6%. But China has been a higher weighting in the past and will likely be a higher weighting again at some point.

Japan's market has been good this year.

Yes, it has. Cost management has gotten a lot better, but financial productivity is not very good at all. Companies are earning better margins than they used to, and more consistently, but the balance sheets of Corporate Japan have gone to being too weak to being too strong, and inefficient.

Who has attracted your attention there?

Fast Retailing [9983.Japan], which operates chain stores in Japan specializing in in-house-brands casual wear that are marketed under the brand name of Uniqlo. We purchased the stock, which has a market capitalization of $22.6 billion, on weakness following the March 2011 earthquake. Management has been successful in controlling costs and supporting the operating margin. Its share price benefited from a rally following the lows after the earthquake, on stronger-than-expected sales, higher 2012 guidance and increased new-store-opening targets in Asia ex-Japan. We believe that growth will continue to be supported by international expansion in the next 12 months. The stock trades at 21 times next year's earnings.

Samsung Electronics is one of your larger South Korean holdings. Why?

Samsung is one of the world's largest technology-hardware companies. More important, it continues to be one of the most impressive execution stories in the tech sector. It's benefiting from multiple trends that have created a tail wind for its telecom, semiconductor and memory businesses. While it is important to be mindful of the cyclical nature of the firm's largest earnings drivers, momentum is strongly in their corner.

Thanks, George