Hi Geoff, just read your article on Hidden Champions and I'd love to hear any other ideas you have on screening internationally? I've looked at the data on Bloomberg and the FT and typically it only covers a few years. Do you know any companies that hold accurate historic data on the lesser-known international companies?
I should have done a better job explaining why you should use Bloomberg. The reason for using Bloomberg is that they have the best worldwide coverage of stocks in terms of having a stock’s name in their database. As a test, you can try typing Watlington Waterworks into almost any stock website on the planet and – you’ll get zilch.
You type that name into Bloomberg and you immediately see “WWW:BH Watlington Waterworks Limited.” You get the previous close, 52-week range, bid and ask price. The dividend yield. The earnings per share. And most importantly this business description:
“Watlington Waterworks Ltd. provides potable water to the commercial and retail sectors of Bermuda. The company supplies its customers from either electro-dialysis reversal of ground water or reverse osmosis of sea-water.
Now, Bloomberg doesn’t have financial data on the company.
But you're not going to start with Bloomberg. You start at the FT Screener. Or you start with a foreign stock idea you read about on some blog. It doesn't matter. You only use Bloomberg once you have the stock's name.
For the FT Screener, screen one country at a time. You can do very simple value screens. I think a single-digit P/E screen is a perfectly good first pass. Go through each country just looking at stocks with a P/E under 10. You'll miss some bargains. But so what? There are enough decent companies with a P/E under 10 in Europe right now. Why make things harder for yourself by trying to find companies with losses, high P/E ratios, etc. that are still bargains despite those facts? Why not just scoop up the simplest, most obvious bargains?
That's would I'd do.
Okay. You've done your screen. Let's say you have an interesting looking company name now. And you got the company description from Bloomberg. So, you can go to the company’s own website if they have one – Watlington Waterworks doesn’t – or you can go to the country’s stock exchange. In this case, you’d find this page for Watlington Waterworks at the BSX.
This is just an example. You may remember I used Watlington Waterworks in my blind stock valuation post a while back specifically because I thought Watlington was a company literally nobody reading my blog had ever heard of.
If Bloomberg has a company like that – available through a company name, not just ticker symbol search – then they’ve basically got every stock in the world you might be interested in.
This is not true of other websites.
Let’s talk about MSN Money. MSN Money has 10-year financial data. So you can find 10-year financial data for companies in Japan, Europe, etc. by using MSN Money’s country specific search feature here.
Here are some examples of MSN Money’s 10-year financial data for foreign companies as big and small – known and unknown – as:
· Otec (1736)
· Kitakei (9872)
· Natoco (4627)
· Chuokeizai-Sha (9476)
· Fuji (3515)
· Excel (7591)
· Vivendi (FR:VIV)
· Precia (FR:PREC)
· Poujoulat (FR:ALPJT)
· Olympique Lyonnais (FR:OLG)
· Jensen (BE:JEN)
· Danieli (IT:DAN)
· Mediaset (IT:MS)
· Geox (IT:GEO)
· Mediaset Espana (ES:TL5)
· Baron De Ley (ES:BDL)
· Iberpapel Gestion (ES:IBG)
Okay. So, you can get 10-year data for many foreign stocks over at MSN Money. They don’t do a good job of advertising this feature. But it’s there. And you should use it.
The problem is that the search is set up so you have to specify a country. For example, if you think a company is Spanish and it’s actually Portuguese – you’re out of luck. That’s an easy mistake to make if you are going off a blog post or something where somebody mentioned a company was cheap. And what stuck in your mind was just the company name. You may not remember if they said it was Spanish or Portuguese. If it’s Portuguese, all you’ll get in response to your search is that there’s no such company in Spain.
The only countries MSN Money let’s you specify in the “Country” drop-down menu are:
· United Kingdom
· United States
Yes. Those are big markets. And for investors using online discount brokers – those may be your only options for picking individual stocks. But it’s actually not hard for a lot of investors to buy a stock in Ireland or Portugal or a lot of other small countries. Well, those countries aren’t part of that search page.
So how do you find information on companies like:
· Corticeira Amorim
Lots of investors can’t invest in certain countries using their current brokers. And lots of investors are unlikely to want to do much research on a micro cap stock in Denmark, Portugal, etc.
If a stock is not super tiny it will often trade in Germany even if it is actually a Danish, Portuguese, Greek, etc. company. So you can actually find companies outside of the major European countries that can be bought without actually having to go outside the European countries you are most used to dealing with.
Some companies do not report information in English. A lot do. Obviously, if you are a Danish, Portuguese, or Belgian company – you can’t really expect that your investors can read in the vernacular. So, like a research paper published in English, French, German, etc. even though it may have been written by professors who grew up speaking totally different languages – companies are going to tend to make information available in English because English is more likely than their own language to be at least the second language of a large part of the investment community they are writing for. This is especially true if the company is not part of some huge economy like France or Germany. In France and Germany, you’ll get a lot of investors even if you never publish anything in English.
The truth is that you don’t need to have English language sources just because you only read English. I invested in Japanese companies. These companies do not report in English. I used Google Translate to switch Japanese to English. It isn’t perfect. But it does the job.
Accounting is actually a bigger obstacle than language. There are not identical accounting practices in the U.S. and other countries. This is more of an issue for American investors than anybody else.
The U.S. uses GAAP (Generally Accepted Accounting Principles). Most of the rest of the world uses International Financial Reporting Standards (IFRS).
There are some differences.
One of the biggest differences for value investors is that GAAP basically insists on historical cost and does not permit the revaluation of non-financial assets. So, while a company’s stocks, bonds, etc. may be carried at their fair market value – the company’s land may not be under GAAP.
This is less likely under IFRS. Property, plant, and equipment – including investment property – is less likely to be carried at an extremely low stated value relative to market value on the balance sheet of a company using IFRS.
Also, IFRS has a totally different way of valuing biological assets – like a vineyard, orchard, etc. – which makes IFRS statements for those kinds of companies totally different than what they would look like under GAAP.
For foreign net-nets, you want to keep in mind that IFRS never uses Last-in-First-Out (LIFO) accounting for inventory. Some of the net-nets in my Ben Graham: Net-Net Newsletter’s model portfolio use LIFO. Under IFRS, these companies would be forced to report higher inventory levels and thus be considered net-nets even if their stock prices were much higher than they are today. For net-net investors, a LIFO company is basically accounting for its current assets in a more conservative way than a FIFO (First-in-First-Out) company.
This is similar to the revaluation of property, plant and equipment.
In general, if you find an old U.S. company with lots of land and inventory (using LIFO) – it’s more likely that there are “hidden” assets in that American company than would be the case if you found a company in another country with identical looking financial statements prepared under IFRS. This is because American accounting (GAAP) offers more possibilities for unrealistically conservative land and inventory accounting than IFRS does.
In case after case of potentially valuable kinds of property, IFRS is less likely to mask an asset’s liquidation value than GAAP is. For example, biological assets are revalued under IFRS but not GAAP. So, a cheap looking vineyard could be a lot cheaper in the U.S. than in other countries even when price-to-book is identical.
I’ll also mention investment property once more. In the U.S., you are more likely to find situations – especially if you focus on old companies with low price-to-tangible book value and high accumulated depreciation to tangible book value that are really even cheaper than they appear. This is less likely under IFRS.
In fact, one of my favorite screens in the U.S. is:
(Accumulated Depreciation/Tangible Book Value) * (Tangible Book Value/Market Cap) > 1
Anywhere from 30 to 150 companies a year pass this test in the United States. And a strategy of just buying these stocks outperformed the market in most of the last 10 years – even without adding any safety criteria. In certain industries – like the energy sector – this is a very simple screen that will often show you the companies that are among the cheapest stocks out there relative to what a competitor would pay to own their assets.
I would not buy those companies blindly. But the screen sometimes includes companies you otherwise wouldn’t look at.
A nice requirement to add – if you don’t want to get a list of companies that are in or about to be in bankruptcy – is to insist that tangible book value is greater than total liabilities. This is an onerous requirement. And a good sign of a company with low liabilities. You can also add a positive net income requirement so the full screen looks something like this:
· (Accumulated Depreciation/Tangible Book Value) * (Tangible Book Value/Market Cap) > 1
· Tangible Book Value > Total Liabilities
· Net Income > 0
Far fewer companies pass that test. And it’s a real Ben Graham type list.
The reason it works has to do with accounting. In general, if you just look at price-to-book alone you’ll get some companies that are relatively young, have low or no retained earnings, and do not use conservative accounting.
Insisting on high accumulated depreciation relative to tangible book value usually fixes all these problems under GAAP. It’s very hard for a young company to have accumulated more depreciation expense than it has in tangible book value. And it’s obviously much easier to do if you are depreciating your assets quickly.
Some of the differences between GAAP and IFRS mean that today’s book value under IFRS will not have the kind of hidden built in margin of safety you find in some balance sheets prepared using GAAP.
So, if you are just getting started investing in other countries, I would recommend focusing on earnings bargains rather than book value bargains. It’s okay to buy companies that are cheap relative to book value if they have also had consistent earnings for the last 10 years or so. Paying a low price-to-10-year-average earnings is a good place to start investing in other countries.
And a low EV/EBITDA is a good metric to use around the world. EBITDA erases some of the differences that come from accounting choices.
There are good screeners out there for specific countries. For example, in the UK you want to use SharelockHolmes.
Once you find a company you like, go to the company’s own website and read as many of their annual reports – not just the most recent one – as you can find. This is a very important part of getting comfortable with your investment.
So, I’d suggest the following online research process for finding foreign stocks:
· Screen for stocks in specific countries using the FT Screener
· Check the business description, EV/EBITDA, etc. at Bloomberg
· Look at the 10-year financial history at MSN Money
· Go to the company’s website and read their annual reports
It’s not that different from how I do things in the U.S.
I’m sure you’d prefer an easier answer. But that’s actually a pretty easy process. It takes a couple seconds to move from one website to another. Why would you stick with one website when some of its features are clearly inferior?
Take the best from each of those websites.
And, remember, you need to look at the 10-year financial history. Without that, it’s very hard to buy any stock with confidence.
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