The fully on-line European Investing Congress will take place October 9th and 10th. The organizers of the conference conducted some exclusive interviews with some of the great investors speaking, including Howard Marks. Below are some highlights from those interviews. All the speakers mentioned below will be speaking in four days from now.
Howard Marks, Chairman of Oaktree Capital Group LLC (NYSE:OAK), on comparing European valuations to European fundamentals:
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What the investor has to do is weigh out on the one hand price and on the other hand reality. Everybody thinks very dire thoughts about Europe and the Euro, and I would be the last person in the world to argue against that position. Then the next question is, European assets are lower in price because of the macro conditions, but are the macro conditions being viewed too pessimistically? The answer is, how do you know? Go back to second-level thinking. Are you capable of thinking different and better about the fate of Europe? I don’t think so. I don’t think I can. I don’t think anybody really has a good handle on what is going to happen in Europe.
So then, how can gaming the Europe situation give you an edge? If you don’t have control over something, superior insight — I don’t see control in the sense of being able to make it work — if you don’t have superior insight, then how can something be to your advantage? One of the tenets of our philosophy — you named number one, which is risk control — number five is, we don’t bet on macro forecasts. It is very hard to consistently be above average in correctness with regard to the macro.
Charles de Vaulx, Chief Investment Officer of International Value Advisers, on one of his favorite European investment ideas:
One stock that we’ve bought over the past six, nine months is a French-based company called Teleperformance SA (EPA:RCF). They run corporate call centers, and that’s a case where all of the earnings pretty much come from the United States. They’re very powerful in the U.S. In fact, for all practical purposes, Teleperformance SA (EPA:RCF) should be headquartered and listed here. It’s sort of an accident that it is listed in France. Teleperformance SA (EPA:RCF)’s French founder happens to live in Miami, and it’s an interesting case where the French operations are losing a lot of money.
It’s much harder in France than in the U.S. to fire people and so they are not able to stop the bleeding right away in France, and I think we feel that we can quantify what those losses will be. Worst case, the company can hopefully shut down the business over time, and I think those losses in France mask the quality of their earnings in the U.S. Historically, there have been many instances where we have dabbled a lot in what we call high quality, yet, cyclical businesses.
François Badelon, Fund Manager at Amiral Gestion in Paris, on French retail industry investments:
Carrefour SA (EPA:CA) used to be a very-easy-to-understand company. Actually, it was one of the first models I made after reading the Buffett book. Carrefour SA (EPA:CA) had about 200 hypermarkets, and they were adding hypermarkets every year. So, you could do a very easy model. It was so simple. They have many hypermarkets, and in 10 years’ time they will have so many. But now, I know they made a big mistake in 2000. Carrefour SA (EPA:CA) bought another huge hypermarket company in France. So, for me, the story was over. They couldn’t add more hypermarkets like that because they were so huge in France. They were paying a very high price to start those. I think they were not very good at allocating capital because the cost of starting a hypermarket in those countries was very high. Maybe there will be one day where you will right, but, for me, it’s a very complicated story to understand. What will happen with those mega hypermarkets? Will the French customer prefer supermarkets or hypermarkets? It’s too difficult. I don’t want to think about it.
Philip Best, Portfolio Manager of the Argonaut Fund, on the pitfalls of European micro-cap investing:
Some of the companies that you happen to find quoted in Switzerland — the Bergbahnen, the Mountain Railways, the ski lifts, that stuff. There does come a point in micro-cap investing where you have to say “yeah that looks very interesting.” But at the end of the day, the Jungfraubahn is the Jungfraubahn. It can only carry a certain amount of passengers. Maybe the Chinese will replace the Japanese as the major source of tourists.
Maybe they can run the trains a little faster every year. At the end of the day it is a mountain railway that serves one mountain. And the danger is with micro-cap investing that if you start to look at micro-cap investing it becomes a bit like stamp collecting you end of up with a album of oddities, of strange things. Which are each fascination and each are really
interesting but at the end of the day even if it is cheap it is just one mountain railway. What we are really interested in finding is little businesses building hospital software programs or whatever, which do have some real growth.
Richard Oldfield, Executive Partner of Oldfield Partners, on the misunderstood opportunity in Nokia:
Nokia Corporation (NYSE:NOK) is an extremely good example of this… We don’t know which way Nokia Corporation (NYSE:NOK) is going to go. We may have got this wrong. Our view of Nokia is that you have an enormous amount of downside protection because of their stakes in Navteq and NSN [Nokia Siemens Networks], and they’ve got €5.4 billion of cash. Then there’s the intellectual property.
We’ve seen a whole row of deals recently: Motorola Mobility; the Nortel liquidators selling assets which were largely intellectual property, which initially had a price tag of $900 million and ultimately went for $4.5 billion; another deal involving Nokia and Apple themselves — several deals which allow a read across to the value of Nokia’s intellectual property.
It’s difficult to be exact about this because the disclosure is not all that full, but we think their intellectual property portfolio is probably worth between €10 billion and €20 billion… This is a typical clash between the short term and the long term. In the short term, people say, “We’re going to have some appalling quarters from Nokia,” and they’re dead right.
The long term it says, there is all this value, there’s an extremely decent probability that the Lumia joint venture will be successful and that the smart phone share will rise to 12 or 13%, something of that sort. If that‘s the case, then the upside of Nokia Corporation (NYSE:NOK) is huge, and so that’s our position. I think there is a tremendous clash in Nokia’s case between the voting machine aspect of the stock market and the
weighing machine aspect.
Thomas Russo, Partner at Gardner Russo & Gardner, on why he is finding opportunities in Europe at this time:
As a value investor Europe is actually a good cover for us. Today most American investors fear Europe. They fear the pigs, they
fear the collapse of the common currency, they fear down trading in Europe, bearing pressure on margins. But it ignores the real
story, which is that Europe in some ways, for me, is a pass through vehicle.
The businesses that we own are based in Europe. They happen to have the product franchises and brands that the rest of the world covets. We have to buy the European expression because the rest of the world doesn’t offer such compelling products. And so we take on European risk but through European companies we actually get non-European reinvestment in the building of those brands and then the cash flows that come back over time are going to come back, I think, in stronger currency vis-a-vis both the euro and the dollar.
Because of all of the obvious concerns that investors have about Europe’s current state, our businesses in Europe—based in Europe—I think bear a lower valuation than their non-European counterparts and that gives us a chance to buy the exact same coveted growth in developing emerging markets at a lower multiple in Europe and buying through a weaker currency through the euro.
Amit Wadhwaney, Founding Manager of the Third Avenue International Value Fund, on European opportunities:
We own a Greek cement company [Titan Cement Company] [Athens: TITP]. Before I get into the details, think of what we’re trying
to do. We want to buy businesses cheaply that are going to be around for a while. So going back to the discussion about business models, about not needing recurring financing, you make the first important assumption that the capital markets are going
to close down.
You, company in Greece or company in Italy or company in Spain, are not going to have access because your banks are bust. And nobody wants to write a check for a Spanish company or an Italian company. So you should have the ability to survive
on your own for a reasonable period of time, a year or two years, without having recourse of external financing. Because otherwise
you might be in the position that if you don’t get your bank financing in place you might have to engage a terrible idea.
Equity financing, for example, there’s always somebody willing to write a check at a price. If I’m your investor I don’t want to tie me down to financing, too, and reduce the value of my holdings. So you’ve got to be able to survive the near term.
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