9 Undervalued Stocks From Around the World


9 Undervalued Stocks From Around the World


Tocqueville’s James Hunt has outrun the index in good times, and, importantly, in down markets too.

A series of black and white photos line the wall of James Hunt’s New York office, testament to the day three decades ago when he outran the bulls in Pamplona.

And in his 13 years running the Tocqueville International Value Fund (ticker: TIVFX), his investments in international large value stocks have outpaced his benchmark, the MSCI EAFE international stock index. He did get gored in 2008 and 2011, but didn’t fall as much as the index. His annual average return of nearly 8% over a decade is nicely ahead of the index and puts the fund in the top 10% of its category, according to Morningstar.

Manager’s Bio

Name: James Hunt
Age: 51
Title: Partner and portfolio manager, Tocqueville Asset Management
Education: B.A. in history, Brown University; M.B.A., Yale University
Free Time: Skiing, cycling

Roughly half of the fund is invested in Europe and another 25% in Japan. Hunt bet early on economic recovery in Japan and later in Europe, which has helped boost the out-of-favor stocks he prefers. He remains bullish on each region, as he was when Barron’s spoke with Hunt two years ago.

He’s also keeping an eye on developing countries. Emerging markets contribute one-third of the portfolio’s cash flows, Hunt estimates.

The bulls have looked a bit wobbly of late, but Hunt is unfazed. He plans to ignore benchmarks and continue taking risks that he hopes will beat the market. He doesn’t buy banks, and he’s not afraid of downtrodden cyclicals.

“We’re contrarian and value-oriented, which leads us to areas that are perceived to be risky. But we don’t view them as risky,” Hunt says. “When people have sold, a lot of the risk has been squeezed out, assuming it is a good business.”

Barrons.com: Explain your investing style.

Hunt: We are buying things in areas that are out of favor, where the consensus is negative [and] the long-term reality is better than the market perceives. We buy good assets at a deep discount to their true intrinsic value – a 30% discount to what it is worth today – that are growing intrinsic value. If we own it for three years, the discount should close as the market recognizes issues are temporary.

Q: What’s your sense of the world now?

A: We are less focused on what is happening in the world and more focused on company fundamentals. The U.S. market in general is fairly valued. I think Europe is cheap. Japan is totally a stock-picking market, and emerging markets bear analysis. South Korea is an example. We are focused on emerging countries that do business with the U.S. and are capital exporters rather than capital importers. If interest rates go up, companies that owe a lot of money and rely on borrowing money are going to be disadvantaged. I am not interested in Turkey, yet. They are a big capital importer and dependent on external financing. Turkey’s banking system has a lot of domestic debt and the country seems to be moving in a more conservative direction, and that could affect their ability to do business.

Q: You trimmed your emerging-market exposure coming out of the financial crisis?

A: Emerging markets became more fully valued than developed markets. The better way to get exposure to the economic growth in emerging markets was through developed-markets companies. Emerging markets as an asset class have done very badly in the last couple of years….We’re not finding a lot that is interesting yet.

Fund Facts

(as of Feb. 3, 2014)
Tocqueville International Value Fund(TIVFX)

Assets: $257.7 million
Expense Ratio: 1.3%
Front Load: None
Annual Portfolio Turnover: 37%
Yield: 1.53%

Source: Morningstar.com

Q: What have you found in China?

A: People have been worried about the Chinese banking system and the slowdown in Chinese growth that has affected the Chinese market. It has also affected stocks in Hong Kong that do business primarily in China. We generally don’t invest directly in China because we don’t think we can trust the corporate governance and accounting. We recently boughtGreatview Aseptic Packaging

(468.HongKong). They are based in Beijing and make vacuum packaging, germproof containers for fresh milk, and they’ve got a very strong market position. There is some pricing power. It is contrarian in two senses: One, I am not concerned about national gross-domestic-product growth rates as part of investment thesis, and two: China had milk quality scares.

Q: Bain Capital, the private-equity firm, owns a big piece of the company.

A: Yes. You can have a certain degree of comfort about the management and the accounting practices when Bain still retains a stake. So the stock is out of favor and cheap compared with intrinsic value.

Q: And the valuation?

A: It has a price-to-earnings ratio of 12 times 2014 earnings, awfully attractive. It’s growing earnings at an easy 12%-15% clip. They pay out a dividend of 2.25%, which is reasonable, and it’s growing.

Q: What’s out of favor today?

A: Mining. Everybody is worried to death about commodity prices, which have been declining. With Chinese growth, and 10 years of overinvestment, companies that produce commodities, and those that serve companies that produce commodities, have gone down in price. We’re looking for opportunities in companies that serve the mining industry, because their cash flows are more dependent on mine production volumes, which are still growing generally, rather than on the commodity price, which is uncertain.

Q: A name?

A: We recently bought an Australian company called Incitec Pivot (IPL.Australia). They have a fertilizer business, but we bought it for a business that makes explosives used to create or expand mines. It’s used primarily in coal mines in Australia and the U.S.

Q: What’s the demand story for explosives?

A: People were worried that the demand for explosives would fall off because coal prices were down and coal companies were making less money. But you still need the explosives to produce the stuff and iron ore. And there’s even a countercyclical argument: If mining companies cut back on their greenfield expansion, they need to deepen existing mines. So they need more explosives. The bottom line is, the thing just got too cheap.

Q: What about price performance, and valuation?

A: The stock was down from 4.50 Australian dollars (US$4.02) to $2.50. We were buying it at $2.60, at about 13 times this year’s earnings, and 11 times next year’s earnings. It is now trading at about 14 times this year, 11 times next year. This is a highly cash-generative business with an over 4% dividend, the balance sheet is good, and it’s trading at a low-teens multiple of free cash flow. On a discounted cash flow basis, we think it’s worth $3.60 today, and that intrinsic value is going to increase over time.

Q: What do you like in Japan now?

A: New management teams that are focused on improving returns on capital and margins. That is critically important. Most of the companies we own in Japan have net cash. We like Hoya (7741.Japan) even though it’s done pretty well. I like Fujifilm Holdings (4901.Japan), a big cash generator, and I like Disco (6146.Japan). Nothing to do with dancing. They make diamond drill bits and also buffing abrasives used to cut and buff semiconductors. They have dominant global market share, so it is sort of a growth-cyclical. They depend on semiconductor industry capital spending, but over time they are also trying to dominate their space.

Q: What Europe investment theme do you like?

A: Construction. Everything from refurbishing to residential to commercial. You’ve seen this multiyear protracted recovery in the U.S.: first, spending on fixing a place, then on building new places, residential, now finally the commercial market is perking up. I think that same pattern is going to follow in Europe.

Q: A related name you like?

A: Wacker Neuson (WAC.Germany). It makes compact equipment used for moving dirt around. And one of our biggest positions is a company called Compagnie de Saint-Gobain (SGO.France). It is 25% construction materials, 50% distribution of building materials, and they are largely Europe focused. Saint-Gobain made the glass for Louis XIV at Versailles. It is trading at about 40 euros (US$54.58), and we think it’s worth €50 on a discounted cash-flow basis. Wacker Neuson is trading at €12.12, and we think it is worth €16. A quirkier name is Lindab International (LIAB.Sweden). Lindab does about half its business in Scandinavia, and about a quarter of its business in Eastern Europe, where it’s growing like crazy. They make fittings and pipes that go into ventilation systems, which are for more commercial and housing complexes.

Q: So these are plays on continued recovery in Europe?

A: They are just all good businesses that occupy very strong market positions, and generate a lot of cash. We bought all of them at big discounts, because everybody was scared to death that the depressed construction business in Europe would never recover. The first step is diminishment of fears that there will never be any activity again. The next stage is, “Wow there is actually activity, and we’re picking up,” and we’re just on the cusp of that.

Top 10 Holdings

(as of Dec. 31, 2013)

Hitachi (6501.Japan)
Compagnie de Saint-Gobain (SGO.France)
Hoya (7741.Japan)
Siemens (SI)
Novartis (NVS)
Schlumberger (SLB)
Infineon Technologies (IFNNY)
Omron (6645.Japan)
Bollore (BOL.France)
DCC (DCC.London)

Source: Morningstar.com

Q: What else do you like?

A: Shipping has really been out of favor. There was huge overbuilding, just before the financial crisis, the world economy slowed down, rates went through the floor, and shippers were losing tons of money. There has been this long process of getting supply and demand in balance. They had to first finish the ships on order, and then people needed to take capacity out of the market, retiring ships. We bought Stolt-Nielsen (SNI.Norway). They have two major businesses. One is container storage facilities, which are like enormous hotels for petrochemicals that sit near ports. Customers pay rents that are very dependable, and they increase every year – a steady, cash-flow generating business. They also have a fleet of tankers that moves oil and chemicals around. We think we just paid for the storage business with a free option on the recovery of tankers. The tanker business is still not in good shape, but it has improved marginally.

Q: How much has the stock moved?

A: We bought it at about 120 Norwegian kroner (US$19.56) last year, it’s now at NOK185. The intrinsic value is in the low NOK200s. But our price target for Stolt looking out two years is around NOK250. We look at cash flow on a sum-of-the-parts basis. We value the storage business, which is sort of a steady stream of cash flows, and then we value the shipping business, which is a cyclical stream of cash flows, and together, the price target is based on a slow, steady improvement and the increase in the cash flows from the storage business, and then some recovery and the cash flows from the shipping business.

Q: Thanks, James.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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