Ignore the anti-hype: An undermined euro may be a gain for Yankee investors with a long view and sufficient backbone
December 5, 2012 — 7:27 AM UTC by Guest Columnist David Marcus
Brooke’s Note: I admit that when I think of Europe’s economy, I feel a mild sense of despair. I realize good investing opportunities are typically marked by that emotion —but somehow Europe has seemed like an exception to that rule. Even the casual observer knows how much worse it could still get in places like Greece, Spain, Ireland and France. So David Marcus’ optimistic view of Europe is a mind-bender of sorts — but perhaps a timely one as we all talk about 'new normals’ that involve piddling returns. Here is a basket of assets that could move far more than 1% annually if their home countries can get out of the slough of despond — or perhaps even if they don’t.
In every generation there are a handful of extraordinary chances for great fortune that will be taken by some and lost by many others. We believe that Europe offers just this sort of opportunity to the current generation. The only real question is to what extent investors will recognize that Europe’s future promise represents an outstanding investment prospect today.
There are a number of factors that have set the stage for this generational opportunity, starting with the sovereign-debt crisis that has engulfed the eurozone and undermined the euro’s viability and caused stress and panic in the European markets over the past two and a half to three years. See: Five scary investment scenarios.
Media coverage of the crisis and slow movement to address it by European leaders have exacerbated investor fears about investing not only in those eurozone countries most affected by the crisis, but across the continent. As a result investors have migrated out of European securities with no regard to the fundamental value of the underlying companies.
They seem to forget that the European Union holds claim to the world’s largest economy, with a gross domestic product of $17.6 trillion as of year-end 2011. Europe is home to many of the world’s best known and most respected companies and brands: names such as Allianz, Airbus, Anheuser Busch InBev, BMW, Daimler, Groupe Danone, Gucci, HSBC, IKEA, L’Oreal, Louis Vuitton, Nestle, Renault, Roche, Royal Dutch Shell, Sanofi-Aventis, Siemens, Unilever, Volkswagen and Volvo. See: How Bob Doll, Milton Ezrati and Tony Crescenzi see brightness in the murky 2012 outlook.
The opportunity today is to invest selectively in deep-value European securities where patient, forward-looking management teams are endeavoring to unleash operational and financial catalysts for value creation.
Over the past decade, the major factors that have contributed to this extraordinary opportunity include:
1. The introduction in 1999 of the euro — a common currency that established monetary union, but not complementary fiscal union across Europe.
2. The eurozone sovereign-debt crisis, the product of years of intemperate financial and fiscal practices.
3. The financial media, which has stoked disproportionate fears of a continentwide economic meltdown.
4. The herd migration out of European securities irrespective of valuations.
5. The slow movement of eurozone leadership toward addressing and resolving the debt crisis.
At the same time, the key factors shaping the full scope of the investment opportunity going forward include, after a painfully slow start, the progress finally being made by Europe’s leaders toward long-term solutions to the debt crisis. In some countries — notably Spain — relaxed regulations that have allowed companies to take advantage of the crisis by engaging in significant cost reduction and operational restructuring programs.
Meaningful steps are also being taken by individual-company management teams to move their organizations beyond crisis and establish even stronger positioning for renewed growth and enhanced valuation. Other positive indicators include signs of an explosion in merger and acquisition activity coupled with low valuations across most of the European continent, not just the Eurozone. See: The top 10 deepest fears — and highest hopes — of RIA practitioners.
Though challenges lie ahead, we strongly believe that investors with the backbone to ignore the short-term paranoia now driving views of Europe, maintain focus on Europe’s prospects, and sift with diligence and discrimination through the rubble created in the crisis’ wake — with the goal of identifying undervalued situations with fundamentally attractive prospects — will be well-rewarded.
The crisis has presented many companies and their management teams with the need — and the opportunity — to refocus on the fact that as the world has shrunk, businesses are no longer competing only with local competitors. With technology improvements, advances in communications and the relatively low cost to transport goods, businesses are competing with anyone who makes a similar product virtually anywhere in the world. See: Nine threats to the RIA business and how they can be avoided.
For investors, current European opportunity includes companies that have been beaten up — yet offer attractive assets and real prospects for moving forward. Because the market has written them off, they can be superior turnaround situations. Entire classes of companies can represent diamonds in the rough by virtue of operational or ownership business attributes not universally appreciated by the markets — but offering enormous potential in the view of discriminating investors.
Opportunity also can be found in buying equity in businesses that are headquartered or traded in Europe, but have exposure to non-European and/or emerging markets. As “European companies,” these securities have traded down significantly, yet they offer considerable unrealized value because their primary businesses are conducted on other continents.
The time is now
Today, savvy investors need to pounce on carefully targeted opportunities. They need to recognize that current market prices do not reflect true value and that well-managed businesses will be worth substantially more after their own viability, and their home country’s solvency, is no longer in question.
In such a market, one cannot overstate the importance of being a long-term investor. The reality is that it is nearly impossible to remove short-term market risk from a fully-invested portfolio of equity securities. However, an investor can eliminate individual investment risk by identifying the eventual — yet undervalued — big winners amid the uncertainty. The far greater risk is to miss the opportunity entirely by being absent.
As Benjamin Graham, the “father” of value investing, once said: “Abnormal or abnormally bad conditions do not last forever.” We do not know if we have seen the bottom in Europe. Can a security trading at 35 cents on the dollar decline to 30 or 25 cents on the dollar? It certainly can. However, we strongly believe that selectively buying securities at current valuations allows for a significant margin of safety — which means that the right entry point for investing in European special situations is now.
History has shown that long-term, patient investors who take advantage of opportunities during times marked by crisis and panic have been well-rewarded. Letting time do its work and timing an appropriate entry point, which we strongly believe is now, will be key to winning in Europe.
The path to this opportunity will be clear to patient and careful investors—and they will see that the time to begin the journey is now.
David Marcus is co-founder, chief executive and chief investment officer of Evermore Global Advisors LLC, a Summit, N.J., investment manager that employs an active value investment discipline to find undervalued companies anywhere in the world with the potential to yield long-term value for investors.
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