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Finding Investment Value Outside the U.S. (A Big Mackerel in Small Fjords)

July 16, 2013 | About:
When I sit down to write an article, I battle with two emotions. First, there is fear: Despite having penned hundreds of pieces over the years, I am still afraid that I won’t be able to turn my mostly boring thoughts into an interesting story. Then the second emotion kicks in: curiosity. I cannot wait to find out what the article will look like.

I know what I want to say, but I rarely know how I’ll say it. Take this article, for example. The point I want to make is extremely simple: U.S. investors shouldn’t look at all international investing as a risky endeavor; in fact, it can reduce risk. I want to make that point via an example — Atea Group (OSL:ATEA), a high-quality Norwegian information technology company that is very cheap.

U.S. investors have been brainwashed into thinking that whenever we venture beyond our shores we take on more risk. We are spoiled by the size of the U.S. market, by the stability of the dollar and by our economy and political system. If by definition the U.S. is the safest country, the logic goes, then all other countries must be riskier.

If you were to apply this logic to stock investing, you’d just buy whatever was the highest-quality company, ignore the price and hold it forever. Because recognizing quality is relatively easy, you’d be buying a lot of overvalued stocks. Good luck with that.

A top-quality company that is overvalued is a worse investment than a slightly lower-quality company that is significantly undervalued. The same logic is true for international investing. If you take a slightly higher country risk but invest in a much cheaper asset, you will take on lower overall risk.

In the case of Atea, this begs the question: Is Norway riskier than the U.S.? Norway is part of NATO, and it is leveraging on the U.S.’s $700 billion defense spending, so it doesn’t need to worry about a Russian invasion any time soon. Its debt-to-GDP ratio is only 30 percent, less than half that of the U.S.; its GDP per capita is higher than in the U.S.; it spends 7.3 percent of GDP on education, while we spend only 5.4 percent; and its unemployment rate is less than half of ours.

Unlike most of its European comrades, Norway has its own currency, which has held its own against the dollar over the years, and it is one of the few countries that is not addicted to quantitative easing. Oh, and it has a budget surplus, something we have not seen in the U.S. since I don’t know when. So here’s a bit of a paradox: Norway is a tiny fraction of the size of the U.S., but it is no riskier for investors.

Norway’s and Scandinavia’s small sizes provide a significant competitive advantage for Atea. The bulk of the company’s revenue comes from Norway, Sweden, Denmark and Finland. It has roughly a 16 percent share in these markets and is bigger than ten of its largest competitors combined.

Atea provides IT to major corporations and governments. It sells hardware (including Hewlett-Packard Co. (HPQ) desktops and servers, Cisco Systems (CSCO) routers and EMC Corp. (EMC) storage) and software (it is one of the largest resellers of Microsoft Corp. products in Scandinavia). Service is its crown-jewel business, bringing stable recurrence of revenue and both cementing and stimulating hardware and software sales.

Atea’s relatively large size gives it a competitive advantage against smaller rivals, as it gets better pricing from suppliers, and it has been taking market share for years. At the same time, it would make little sense for a large foreign competitor to enter Scandinavia to compete against Atea. Sweden has a population of less than 10 million people; Denmark, Norway and Finland have about 5 million each. All speak different languages and have diverse cultures. A big foreign competitor could start buying the little guys to get close to Atea’s scale, but it would have to do a lot of buying, and for what? Atea has long-established relationships that would be very difficult to displace. Also, there is no strategic significance to success in these markets: Scandinavia is not a gateway to Russia (maybe only to the North Pole).

Today’s opportunity is created because Atea’s hardware sales (half of its total revenue) have stagnated — the approaching death of the PC is written all over the stock. But though the consumer PC market is being hurt by tablets, the devices have little or no impact on the corporate market, as PCs are productivity devices and governments and corporations need them. Historically, Atea has grown a few percentage points above the market, and that is unlikely to change. The company has no net debt, trades at about 10 times free cash flow and pays a dividend of 9 percent.

Taxes amount to half the GDP of Scandinavian countries — these nations are even more socialistic than France — and half of Atea’s revenue comes from the government. Atea is a great hedge if capitalism doesn’t work out.

There! The fear is gone, my curiosity is satisfied, and I think I have arrived at an interesting and defensible conclusion.

About the author:

Vitaliy Katsenelson

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).


Visit Vitaliy Katsenelson's Website


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