With a rocky economic recovery, millions of gallons of oil spilling into the Gulf of Mexico, and sovereign debt crises in Europe, what is there to be happy about? Plenty, if you were one of the value managers at Wednesday’s panel discussion on investment opportunities, sponsored by American Beacon Advisors in New York City. Several managers agreed it is a stockpicker’s market given the run-up that started in March 2009, but the bad news now crowding the headlines is providing the sort of downward pressure on stock prices that can produce bargains for a discerning investor, they said.
“As we all know, there are a lot of undervalued situations that should be undervalued. We’re looking at those undervalued situations that have strong and/or improving financial productivity,” said Michael Bennett, managing director and portfolio manager at Lazard Asset Management LLC. “There actually are some value opportunities in the front of the store where you’re paying a little bit more, but you’re getting a lot of financial productivity.”
In spite of debt problems in Europe, there are companies based there that look promising because of their exposure to other parts of the world. Bennett said U.K-based Unilever does more than half of its business in emerging markets. Even a weakened euro helps European exports by making them more price competitive, Bennett said; expect the euro to survive as a currency, he predicted.
The financial crisis forced many businesses to undergo “massive expense reductions that, before, you wouldn’t think were possible,” said Jim Miles, portfolio manager and principal at Hotchkis and Wiley Capital Management LLC. A boat manufacturer he knows who had about 20 locations now operates with just three or four, for example. For companies that have bitten this bullet, “Every incremental dollar that they get in demand is hugely profitable for them, and that sets the stage for the competitive spirit to come back,” he said. “Companies say, ‘If I can get a little more market share, I can make a lot more money.’”
Where are the bright spots? Mark Giambrone, principal at Barrow Hanley Mewhinney & Strauss Inc., sees large technology companies that are trading at lower valuations. Bennett likes some players in the pharma industry, where companies are increasing their exposure to the emerging markets.
Even some older companies have successfully managed to reinvent themselves in the past decade, said Patrick S. Kaser, portfolio manager at Brandywine Global Investment Management LLC. IBM, formerly synonymous with computer manufacturing, now focuses on business consulting services, he said. McDonald’s has gone from a burger-and-fries empire to one that caters to customers whose tastes run more to salads and chicken sandwiches, a move that’s produced “tremendous” same-store sales growth, he said.
Steve Carroll, managing director at CB Richard Ellis Global Real Estate Securities, said improvements in commercial real estate are starting to unfold, and real estate investment trusts that specialize in the sector will benefit. Well-capitalized REITs—$70 billion in new equity and $43 billion in new debt have been raised since last year—are in a position to acquire properties that were over-leveraged a few years ago and are facing difficult refinancing prospects in the next few years. Well-managed REITs also can poach tenants from weaker landlords, Carroll added. “This will take years to play out; REITs will be the beneficiary of this process,” he said.
Bennett sees a savvier investor in the markets these days. “People are more focused on risk, which is actually a good thing,” he said, “because good companies that have strong financials, great balance sheets and strong cash flows should be the ones that do well, and that hasn’t necessarily been the case in the last couple of years.”
The discussion wasn’t all about silver linings, however. “Greece does have a serious debt problem and a serious issue with solvency,” said Paul Psaila, managing director at Morgan Stanley Investment Management Inc. “We don’t think it’s overblown.” And steps need to be taken to prevent a recurrence of the May 6 “flash crash” that saw the Dow Jones industrials lose nearly 1,000 points in under 30 minutes before recovering. “I don’t know how we do it, but obviously we do have to do it,” said American Beacon President and CEO Gene L. Needles Jr. “If you can’t convince investors that the capital markets operate efficiently, they won’t participate. And without that, business can’t exist and thrive.”