by Tim Melvin | September 6, 2013 3:06 pm
Although smaller stocks are usually my bread-and-butter, I occasionally like to run a screen looking for large-cap stocks around the world that are trading well below book value. Such a screen gives me some useful information about the world while turning up some super-cheap stocks with big potential.
This screen is often very profitable. It led to me buying into Japanese banks back in 2010, large insurers in Europe and the U.S. in 2011 and Irish banks in mid-2012 — those plays have turned into monster stocks for me.
When I run the global screen for cheap large-cap stocks today, I find that the cheapest stock in the world is once again a bank. I have owned shares of Royal Bank of Scotland (RBS) for several years now but would not hesitate to put new money into the shares. The bank only survived the global banking crisis because of a large investment from the U.K. government, but that investment now moves RBS into the too-big-to-fail classification. It’s also done a great job of divesting noncore operations such as equity trading, life insurance and aircraft leasing. The stock is currently valued at a little less than 40% of its tangible book value. The bank will recover slowly in line with the global economy, but over the next five to seven years I see the stock a lot higher than it is today.
The second-cheapest stock in the world trades right at 40% of its tangible book value. Korea Electric Power (KEP) is the only provider of electricity generation and transmission services in South Korea. The stock has been hurt by the rumors of war on the peninsula as well as the shutdown of some nuclear plants and delayed construction of two other new plants. The company is hoping to expand outside of Korea into other Asian nations and become one of the ten largest electric utilities in the world. Korea Electric should see demand growth grow about 4% annually for the next five years or so. It’s also getting some help from low coal prices around the world that should make for better profits over the next year.
Trading right in the same valuation range is the second-largest bank in Germany, Commerzbank (CRZBY). This bank has struggled as a result of its shotgun marriage with Dresdner Kleinwort investment bank at the height of the credit meltdown and amid poor loan performance, particularly in its shipping lending operations. The bank just sold its British loan portfolio for about $6.5 billion to shore up its balance sheet. Commerzbank has also announced it will reduce the workforce by 10% or more over the next several years to improve the bottom line. The stock looks ugly right now but is an excellent long-term bet on the recovery of Europe and the shipping industry.
Buying large global stocks at a very low price-to-book multiple is not for the impatient, but it should reward value-oriented investors with above-average gains over the next five to ten years.
At the time of publication, Melvin was long RBS, KEP and CRZBY.
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