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The Search for Global Perfection

Tim Melvin

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More than ever, it makes sense for deep-value investors to expand the search for cheap stocks and bargain opportunities around the world. Accounting standards have converged over the years and it is no longer as difficult to decipher foreign financial statements as it was when I started out. Financial news coverage is much better today and it is as easy to stay on top of developments of a company in Paris or Tokyo as it is one in New York or Orlando. It is much easier to find global bargains using several Web-based screeners with accurate data on companies around the world. They are much easier to trade, with many companies listed on exchanges and many more easily available on the over-the-counter markets.

I ran a screen for international stocks that made the grade as perfect stocks. These companies are located outside the U.S., are profitable, have decent balance sheets, pay a dividend and, of course, trade below book value. I excluded Chinese and Russian stocks from the list because I trust none of the numbers and have no interest in investing in a country whose natural instinct is to treat me as a hostile. This policy has caused me to miss a good stock or two but has helped me avoid many disastrous outcomes over the years.

There are some interesting companies on the list. We have held Japanese banks for several years, but our initial purchase price in stocks like Mitsubishis UFJ (MTU) and Mizuho Financial (MFG) was so far below book value that it still qualifies, despite large gains the past couple of years. Mitsubishi is trading at 84% of book and is yielding 2.1% at this price, while Mizuho is at 91% of book with a 1.3% yield. Both are a good way to share in the continued rise of Japanese markets resulting from government stimulus programs that many expect to see in 2014.

Companies around the world that dig stuff out of the ground are still very cheap in the early stage of a global recovery. I am no economist or mining expert but if there is going to be a continued and strengthening global recovery, then the excess stockpiles of iron ore, coal and other natural resources will get worked off and prices will firm.  Sometime in the next decade, we will see another commodity boom and these stocks will be sold for several multiples of the current price by smart and patient investors

Teck Resources (TCK) fits the bill for long-term mining investors. The Canadian company's primary business is mining for copper, metallurgical coal and zinc. It also produces lead, molybdenum and silver, as well as chemicals and fertilizers. Finally, it has operations in the oil sands field in Alberta. The stock trades at 80% of book value and currently pays a 3.5% dividend. All of the company's products will see increased demand and upward pricing pressure as the economy recovers and investors with a three- to five-year time horizon could easily see their holdings double in this stock.

I was surprised that very few European companies made the grade as perfect stocks. The rally on the Continent has left just a few shippers, like Knightsbridge Tankers (VLCCF) and Box Ships (TEU), along with Irish insurer XL Group (XL), on the list of easily traded foreign securities. I like Europe's recovery prospects, so I intend to take my search down to the OTC-listed European issues and see what I can find over the next few days. I am hoping to find that many of the big family holding companies, like Porsche Automobil Holding SE OTC , still make the grade as perfect stocks. I will report back when I am done digging through the pink sheets and OTC listings.

Global markets give us a chance to find cheap stocks and bargain issues than we would find when we restrict our search to domestic stocks. It has become much easier to find and research foreign stocks, so there is no excuse not to go global.