Oakmark’s David Herro Offers a Few Top Ideas

Renowned value investor David Herro is chief investment officer of international equity at Harris Associates, where he is the co-manager of The Oakmark International Fund (closed to new investors), The Oakmark International Small Cap Fund and The Oakmark Global Select Fund. All of the Oakmark funds have outperformed their respective benchmarks since the market bottom in 2009. Herro was named one of Morningstar’s managers of the decade back in 2010.

Herro recently sat down for an interview with Barron’s to discuss both his investing philosophy and the investment thesis behind a number of his current holdings.

David Herro – Get emerging market exposure via companies in developed markets

One of the key takeaways from the David Herro interview in Barron’s is that you don’t have to take the risk of directly investing in emerging markets to get some of the upside of the rapid growth in EM. He says: “You can buy companies in developed markets selling at much better values, with exposure to structural growth in emerging markets like Kering, the owner of Balenciaga and other luxury brands; Diageo, the global beverage firm; Daimler and Bayerische Motoren Werke, the luxury carmaker. Compagnie Financiere Richemont  – its major brand is Cartier. Prada at this price is also attractive. In our core international fund, our only directly-domiciled emerging market stock is Samsung Electronics, which is 2.6% of the fund.”

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David Herro breaks down Kering

Kering (EPA:KER) owns a number of strong fashion brands, including Gucci, Balenciaga and Bottega Veneta. The firm has experienced management and is enjoying rapid growth. The company also recently gained control of Puma, and will look to continue the turnaround story of the athletic wear maker. Kering is now focused exclusively on luxury brands, and they have growing exposure to emerging markets and stills makes solid profits in developed markets. Herro point out: “It trades at about 14 times next year’s earnings, with very good growth prospects, brands and it is soundly managed. Operating profitability – operating income as a percentage of sales – is about 18%. The sector has been hit because of the slowdown in emerging markets, which I think is cyclical.”

Prices still too high in Brazil

Herro is not bullish on Brazil over the short term as he feels many equities there are still a little overpriced. He notes: “Brazil has serious structural issues that will make it difficult for companies to increase their earnings stream. We would invest at the right price, but companies we would want to own still look too expensive. At the right price, we would be interested in Lojas Americanas, a retailer. Lojas trades at roughly 30 times 2014 earnings and 21 times next year’s earnings. That is not inexpensive, and this is a country with micro- and macroeconomic challenges they have not come close to addressing.” Herro also points out that Brazil can’t count on strong mineral prices to support its economy any longer.

The list of the twelve stocks which David Herro likes –  Kering, Diageo, Compagnie Financiere Richemont, BMW, Prada, Samsung Electronics, Hyundai Motor, BNP Paribas, Daiwa Securities Group, Toyota, Credit Suisse Group, and Olympus