“Be fearful when others are greedy. Be greedy when others are fearful.”
-- Warren Buffett
Since Mr. Buffett has traditionally favored a US market orientation, he was thinking about the inevitable changes in investor behavior that create the market cycles we are all-too-familiar with these days. To his observation above, however, I would now add Shaefer’s Corollary to Mr. Buffett’s dictum. In this globalized world we now inhabit, we must also "Be fearful where others are greedy. Be greedy where others are fearful."
The world may be our oyster, but in an increasingly-globalized world, it behooves us to not employ merely a temporal component to our investing strategy, but also a geographic one. That’s why I look for value when it exists, but also seek it wherever it exists.
Last month, a group of analysts at French brokerage firm Cheuvreux, part of the huge Crédit Agricole group, wrote an open letter to Warren Buffett suggesting that if he is looking for true knocked-down bargains when everyone else is too fearful to buy, he look not at US companies, but European ones. (Crédit Agricole is the world’s 99th-largest company on the Forbes 2000, ahead of Oracle (ORCL), Disney (DIS), Boeing (BA), Google (GOOG), and Caterpillar (CAT), among many others more familiar to most US investors.)
A competing firm made a list of the European countries Mr. Buffett might want to buy, but withdrew them after the “This time we have a deal. No, we mean it. We’re serious this time,” announcement by the most recent EZ and EU meeting. (Just kidding; if Mr. Buffett wanted to buy a country, he’d have bought one by now.)
The Cheuvreux analysts specifically recommended ABB (ABB), headquartered in Switzerland; Unilever (UL), headquartered in the UK and the Netherlands (among their US-owned products are Hellmann’s, Wish-Bone, Ragu, Bertolli, Ben & Jerry’s, Breyers, Popsicle, Lipton, Slim Fast, Dove, and Vaseline); Zurich Financial Services (ZFSVY.PK) also in Switzerland; AXA (AXAHY.PK) in France; H&M (Hennes & Mauritz – HNNMY.PK) from Sweden, and Volkswagen (VLKAY.PK) and Daimler (DDAIF.PK) both in Germany. (Daimler is the manufacturer of a number of marques, including Mercedes Benz and that all-American 18-wheeler, Freightliner.)
The brokerage selected these seven giant multinationals because of Mr. Buffett's well-known goal of buying companies whose businesses he can understand which: have nice moats and great long-term prospects, are managed by ethical and highly capable people, and sell for a fair price. Further, reviewing his past purchases, they concluded that he is especially fond of insurance companies (like AXAHY and ZFSZY,) retailing (like HNNMY) and consumer staples (like UL / UN.) They also included, as particularly attractive, one of my favorite Europe capital goods companies that I’ve discussed in previous articles (theglobal electrical engineering giant, ABB) and, perhaps because they figured if he likes railroads maybe he’d also like a couple of bargain-priced well-managed international car companies like VLKAY and DDAIF.
Regular readers know that I eschew labels like European stocks and American stocks. All the biggest companies in the world are multi-national in their marketing as well as, most often, their manufacturing or services. And virtually every company likes to grow and that means doing business beyond one’s national borders. That’s why Daimler makes Freightliner trucks, Unilever owns Ben & Jerry’s and Toyota (TM) builds cars in the USA. (And why you can enjoy the guilty pleasure of a Big Mac and fries in Paris (MCD) or a Pizza Hut pizza in Beijing (YUM), both of which you arrived at in a Boeing jet.)
So, yes, the ETFs I will discuss today and the companies I will discuss in Part II feature companies “based in” or “headquartered in” Europe. But the world they serve is, well – the world. I wouldn’t consider buying companies whose sales come strictly from Europe. Let’s face it, much as we Americans might decry our legislative and executive branch leadership, with rare exception those “leaders” in the EC have been asleep at the switch.
The only actions they have taken have been when they are pushed so deeply into a corner that they absolutely must stop dithering and actually do something. Most recently, Valérie Pécresse, France’s budget minister intoned regarding the new, new, new same-old, same-old, “It’s a pact of eurozone members for a new governance—a governance with genuine regulation and genuine sanctions that create real confidence.”
We’ll see. US taxpayers, having already underwritten massive gifts to our own bloated, overreaching and incompetent money center banks, have now opened the swap spigots for equally bloated, overreaching and incompetent Euro banks. The result is a win for those who now can continue to float debt with which to encumber their children. The other result is a Euro which is rising, penalizing American visitors to the continent. Welcome to the latest version of “Kick the Can Down the Road.”
Still, I believe the US, at least, is beginning to recover, slower than it has from the most recent recessions, but no more slowly, or from a more dire position than it did from the ridiculous excesses of the 1970s, which Reagan, Volcker, Laffer, et al had to painfully correct, enduring all the slings and arrows along the way. If this one follows that scenario, it will still demand much backing and filling before we are out of the woods.
And if the US recovers, that means emerging markets can still sell us the raw materials we turn into finished goods or finished goods they make themselves. And they will still need our services to help them grow, whether those are oilfield services, educational services, or a host of others. China and the US will be slowed down by Europe’s failure to act, but we won’t be derailed. Who knows? Just maybe, this time, when the can is far down the road, the “austerity” measures will bring Europe back to some semblance of fiscal responsibility.
So I applaud Cheuvreux’s letter to Mr. Buffett. I even share their enthusiasm for ABB, which I see as an absolute bargain at this time. And a few months back I began, and have continued, to nibble at Zurich Financial and AXA. But I would select four different, and what I consider even bigger, bargains with even more of their revenues coming from the rest of the world beyond Europe.
There’s no guarantee that Mr. Buffett will ever join us in these purchases but that’s rather beside the point. These are the type of companies that has made his firm billions. If he’s too busy buying something else, you’re still employing the same kind of discipline he uses. (And if he does buy shares after you decide to, think of the bragging rights: “Yeah, me and Warren are both in XYZ… Of course, I bought it first!”)
The bargains are definitely there for the buying. Between the last week of April and the last week of November, the MSCI EMU Index (which follows the performance of major eurozone markets) gave up nearly 35% of its value. As always, the Good Kids (in this case, those which derive a huge portion of their revenues in nations outside Europe) got pummeled the same as the bad kids.
I see two opportunities in buying certain European multinationals today. One is that they are unfairly tarred with the brush of being headquartered in Europe, so investors have oversold them. The second is that I think they may recover from this bogey, then recover even more when Europe gets its act together.
They really don’t have much of a choice -- and that’s when Europeans typically act. The various tribes scattered across this continent traditionally murdered each other in such numbers that, for their very survival, they had to form unions. That’s why German kings married British queens and Spanish queens married Austro-Hungarian kings and so on.
It wasn’t usually by choice. Often, the bride, bridegroom, or sacrificial lamb was offered up only when there was no other choice. That has become “the European way.” Talk and talk and talk until all reasonable avenues have been exhausted and it’s the 11th hour, then do what you really had to do all along. When they realize that, as Ben Franklin once said, “If we do not hang together, we shall hang separately,” they’ll pony up and Euro stocks will enjoy a second renaissance. They may choose to lose the occasional outlying tribe along the way but, after having banished one or two, the union will survive. The alternative is mayhem.
There are three more considerations to bear in mind when reviewing European stocks in general. First, the continent has a greater population and middle class consumer base than the United States. Next, unlike the US, which owes the rest of the world, most European debt is owed to European banks, investors and taxpayers. And finally, total debt as a percent of GDP for Europe is less than it is in the United States. If you are willing to invest in America, why not invest as well in some of the world’s other developed nations – especially at a discount. Especially among well-selected multinationals that are as well established around the world as they are in their home region.
I will discuss my 7 favorite European or, more accurately, Europe-based, firms in Part II tomorrow. For now, however, might I suggest you consider some fine Europe ETFs? There is at least one that tracks solely the 17 eurozone nations, iShares MSCI EMU (EZU). If you want to go for the most depressed, figuring it will have the biggest rebound, take a look at ETFs like iShares MSCI Spain (EWP) or iShares MSCI Italy (EWI). For my money, though, you’re better hewing to my theme that even the best have been taken down by “association” – simply because they are in “Europe.” For me the best of the best is Global X Norway (NORW). Among its top holdings are some of the best run companies in the world…
Disclosure: We are long NORW -- and 7 of the 7 stocks we'll discuss tomorrow...
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