These roiling global markets are surfacing cheap assets – almost all of them attached to some frightful risk.
That’s why things get cheap of course – because, for rational reasons, those who owned them before got scared out of them. And so, until all the nervous money is flushed out or something changes popular opinion about the danger, they get cheaper.
Emerging markets stocks look horrible, the iShares MSCI Emerging Markets fund (EEM) sinking almost daily in a steady march rather than a cleansing panic. They are tracking commodity prices and EM currencies lower. This fund is just about back to its 2011 lows, set during the global credit scare. Professional investors’ exposure to EM stocks hasn’t been this low for a year and a half, back to a level that preceded a nice rally, according to a new Merrill Lynch survey.
Clearly the market still thinks company profit estimates are too high, or else EM stocks outside Asia wouldn’t be trading under 10-times forecast earnings.
So these things are statistically cheap and demonstrably out of favor – often a good combination for crowd-spurning investment opportunities. But it’s simply too scary for many to think that the nasty cycle of weak economies, falling currencies and tougher debt service will remain in force.
So who’s brave enough to buy, say, South Korea? The iShares MSCI South Korea Capped ETF (EWY) is down 23% in four months in dollar terms and is trading lower than it has in a decade, outside of the financial crisis?
Value fund shop Harris Associates is stepping into this mess from a side entrance, raising its stake in Swiss mining and commodities-trading giant Glencore (GLEN.L) after the stock has lost two-thirds of its value and its market cap has shrunk beneath its debt levels. Harris tries to look out 3 to 5 years and buy cheap businesses that can survive a cycle, and this is the necessary approach. Easier described than taken.
Closer to home, we can look at things such as Micron Technology (MU), cut in half in less than a year and with an enterprise value now less than four-times its past year’s cash flow. But who’s bold enough to have confidence in memory-chip pricing right now, or the returns on its heavy capex plan?
Perhaps a bit less frightening, but still a tough call is IBM (IBM), now valued beneath 10-times forecast 2015 earnings. An investor today needs to ask, with some margin of conservatism, just how much IBM’s forward forecasts can be cut and be absorbed by the stock at these levels. Asset sales? Even more radically cost-cutting? Who knows?
Elsewhere in the Dow Industrials (^DJI), the market is coming to terms with Wal-Mart (WMT), sinking to a significant discount to the market multiple, though not as cheap as it got a few years ago. Are you scared off by the secular drop in physical big-box retail and Wal-Mart’s need to spend heavily just to retain its customers?
Such are the tough questions dogging an investor who wants to be clever and opportunistic.
These cyclical stocks have all been punished in line with a weakening credit market and sluggish global top-line growth. Meantime, the growth momentum names in which many traders were hiding have also pulled back hard.
For those waiting for one of those classic panicky flushes of capitulation in the stuff that looks cheap but might be a value trap, be aware that this market has been stingy in serving those up. Some say the sign of a good value investment is one that almost hurts to make.
So who’s brave enough to take on that pain?
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