Blue Chip Stocks On Sale Worldwide
Oakmark International's David Herro has the record to back up his bullish stance on big, multinational companies.
Don't worry about Europe collapsing -- neither Spain nor Italy will default on its debt obligations. The global economy is growing, albeit at a moderate clip. And all over the world, blue chip stocks are "really, really cheap."
So says David Herro, one of the nation's most experienced and successful pickers of foreign stocks. Herro launched Oakmark International Fund (symbol OAKIX) in September 1992 and continues as its co-manager with Robert Taylor, who joined the fund in late 2008. Over the past 15 years through April 30, Oakmark returned an annualized 7.6%. That beat the MSCI EAFE index, a measure of large-company foreign stocks, by an average of 3.6 percentage points a year and the average large-company overseas stock fund by an average of 2.6 points per year.
Herro is a bargain-hunter, so he is thrilled to have plenty of opportunities today. How cheap is his playground? The EAFE index trades at just 11.3 estimated analysts' earnings for the coming 12 months.
Shares of European companies in particular are cheap, Herro says, because many investors have concluded that all of Europe is crumbling. True, some parts of Europe are in trouble -- Greece is the most obvious example. But northern Europe is doing just fine, Herro says.
Moreover, says Herro, investors are getting too hung up on where a company is headquartered. "Don't look at where a company is located," he says. "Look at where it makes its money."
Many foreign behemoths are generating an increasing portion of their sales and profits in fast-growing emerging markets. Herro lists automakers Toyota Motor (TM) and Daimler (DDAIY), both large Oakmark holdings, as two examples. (All symbols for foreign stocks in this article are for their American depositary receipts).
At the same time, Herro owns virtually no emerging markets stocks. It's not that he sees a bubble in developing markets or that he thinks China will suffer a hard landing as its economy slows. It's just that he is finding better deals in the developed markets. Many of these stocks, he says, are going begging.
Consider two banks, Spain's Banco Santander (STD) and Brazil's Itau Unibanco Holdings (ITUB). At $6.33, Santander trades at 0.6 times book value (assets minus liabilities) and yields 14.5% (all share prices and related data are as of April 30). Santander derives more than half of its profits from Brazil and Mexico, with less than 20% coming from Spain. Investors have fled Santander for fear that Spain will ultimately default on its government bonds, as Greece did.
Meanwhile, Unibanco, at $15.69, yields 0.6% and trades at 1.8 times book value. Herro has nothing against the fast-growing Brazilian bank. He'd be a buyer at a lower price. But assuming that Spain does not default and that Santander eventually recovers, Herro says, the Spanish bank looks like the better deal.
None of this is to say that Herro discounts the potential for a dismantling of the euro zone. He thinks the euro is likely to survive at least a couple more years. But he sees only a 50-50 chance of the euro zone enduring as it is ten years from now.
Herro, 51, epitomizes many of the traits I look for in a manager. He has a sharp, analytical mind, and he isn't afraid to buck the crowd.
It's easy to call yourself a contrarian. It's quite another thing to load up on European banks, such as Santander, when the rest of the world thinks the bank and the country are headed for ruin. Herro has 26% of Oakmark International's assets in financial services stocks, including banking giants Credit Suisse (CS), France's BNP Paribas (BNPQY.PK) and Italy's Intesa Sanpaolo (ISNPY.PK). The latter two trade on the pink sheets in the U.S., so use limit orders if you decide to buy either of them.
Herro took a similar stance toward Japan after last year's earthquake, tsunami and nuclear plant disaster. He invested about one-fifth of the fund's assets in Japanese stocks that he felt would recover as the country regained its footing.
The key lesson for investors, Herro says, is to differentiate between a company suffering a temporary or cyclical downturn and one experiencing a structural problem that suggests long-lasting difficulties. That's the trick to being a good value investor -- and it's often devilishly hard to tell which category a company falls into. But this is the art at which Herro excels.
His fund is not without blemishes. Herro has had some trouble holding onto analysts over the years. I also think the expense ratio, at 1.06% a year, is high for a fund with $8.4 billion in assets. Oakmark International has also been a bit more volatile than the MSCI EAFE index over the past five years. But above-average volatility is part and parcel of his style. "We want to make money over three, five and ten years," Herro says. "Sometimes the trade-off is losing money in the short term or having returns that bounce around."
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
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