Low book value offers and great deals abroad


– By Robert Abbott

If you’re a value investor, here’s another metric to add to your toolkit: net worth. This is the subject with which Christopher Browne opened chapter five of “The Little Book of Value Investing”, published in 2006.

Net worth is a simple idea; add up everything a business owns and subtract what it owes. What’s left is equity and if you divide it by the number of shares outstanding, you get a company’s book value (net worth per share).

Browne said that when looking for cheap stocks, he starts by selling stocks for less than their book value. It was also one of the key criteria for Benjamin Graham, Browne’s mentor. The author added that it had helped him “uncover huge deals over the years.”

One of the reasons the Tweedy company, Browne (of which Christopher Browne was a director) had a close connection to Graham was because it traded stocks selling below book value, at their net worth. This led to his relationship with Ben Graham, as this was exactly the type of stock Graham was looking to buy. “

As a landmark note, Tweedy, Browne’s partner Tom Knapp later convinced the company to become an investment manager rather than a broker by explaining that the company should hold these shares for capital gains. rather than immediately redeeming them.

And this strategy has paid off. The author reported that the company purchased National Western Life Insurance (NWLI) in 1994 at about half of its asset value. By 2006, stocks had appreciated 600%, what Peter Lynch would call a “six-bagger”.

In addition to this anecdotal evidence, he also referred to other people’s findings: “From esteemed Barton Biggs to Nobel Prize winners, study after study confirms that value stocks outperformed growth in all countries studied. (mainly the United States, the United Kingdom and European countries) by a substantial margin. “

The number of opportunities also increased as international stocks became readily available in the United States. For example, Browne made serious profits in shares of Volkswagen (VW); again he picked it up at half its book value and while he was holding it it doubled in value.

In addition to stocks selling for less than their book value, he also leased stocks selling below their net cash balances. These rarities were one of Graham’s favorites, and because they were hard to find, it helped research global and national stocks.

In Chapter Six, Browne went on to point out that about half of all publicly traded companies in the world were based in the United States, while the other half were global or international (as of 2005/06). Therefore, US investors could double their chances of finding cheap stocks if they looked beyond their own borders.

In addition, at the time, 12 of the world’s 20 largest companies, ranked by revenue, were based in Europe and Asia:

“Think of the companies that make some of the products and services you come across every day: Nestlé, ING Financial Services, Honda, Toyota, Glaxo Smith Kline, Bayer, Sony, Samsung, Hyundai, Mitsubishi, Carnival Cruise Lines, Fuji Film, and Heineken Beer. These are all large, well-known companies whose products we use or see almost every day of our lives. Ignoring global opportunities means not investing in many of the world’s biggest and best companies. “

Other experts recommended foreign stocks to achieve geographic diversification, but Browne was skeptical (and he was writing before the 2008 financial crisis). He believed that globalization was pushing most markets into a similar orbit and that a situation in one of them could affect many others. Consequently, he only recommended non-national actions because they presented additional opportunities.

There were still situations, however, where different markets did not move in tandem, again creating opportunities. For example, he noted that Japanese and European stocks were much less inflated by the dot-com bubble of the late 1990s than US stocks. Indeed, the collapse of Asian markets in 1998 brought many bargains to Asia at a time when US stocks were grossly overvalued.

Another example came in the late 1980s, when East Germany and West Germany got together. West Germany was forced to print high volumes of its brands to compensate for nearly worthless East German brands. This resulted in higher inflation and interest rates, depressing European markets for a while.

Browne’s first exposure to foreign markets was in the early 1980s, at a time when most Japanese stocks were going up rapidly, and it seemed like there were few good deals. Through a friend, he was alerted to Japanese insurance companies; Like other stocks there, they seemed overvalued, but Browne learned that market valuations reflected idiosyncrasy in regulation. Just months after Browne bought out eight insurance companies, regulators changed reporting requirements and insurance stocks went from one-third of book value to full book value.

He concluded Chapter Six with these words: “By using a holistic approach, you can double the potential opportunities to stock your valuable investment store shelves and also put yourself in a position to benefit when other markets and businesses are cheaper than your house. based counterparts. “

Disclosure: I do not own any shares in any listed company and do not expect to buy any in the next 72 hours.

This article first appeared on GuruFocus.


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