Many investors continue to believe that European stocks are too risky. But in our view, Europe offers a wide variety of investing opportunities. Other investors’ hesitation to invest in the region has provided us with the chance to purchase high quality stocks that are undervalued simply due to geography.
All too often, investors associate political and macroeconomic instability with the long-term viability of a company’s cash flow stream. At Harris Associates, our research efforts are based on determining the worth of a business and its fundamental characteristics, rather than the surrounding macroeconomic and political environment. Our fundamental analysis aims to uncover this value when others overlook it. The companies we seek have strong balance sheets and management teams, and trade at discounts relative to their intrinsic business values. During the financial crisis, we remained focused on specific company valuations and purchased companies that we believed had the financial strength to survive the market upheaval and eventually flourish.
We believe that there are numerous reasons to invest in Europe at this time. The IMF predicts global growth above 3% in 2014, which provides an environment where European companies can operate profitably. Firms such as Diageo (DEO, Financial) and Nestle (NSRGY, Financial) generate 45% of their operating income from regions that fuel this predicted global growth, specifically emerging markets. Luxury auto makers like Daimler (XTER:DAI, Financial) and BMW (XTER:BMW, Financial) have a dual path to growth - the premium auto sector is structurally taking share within the overall sector, and they have significant opportunities to grow in emerging markets.
Multiple other European companies have taken advantage of the recession to clean up their balance sheets, cut costs, trim capital expenditures, and hoard cash. We continue to like European banks, such as Credit Suisse (CS, Financial). We believe the company has a great private banking franchise, as well as solid asset management and investment banking businesses. This mix can provide a stable income stream in a variety of market environments.
While many investors continue to fixate on the European financial situation, we have focused on the characteristics of well-managed individual companies in the region and found many solid investment opportunities. This emphasis on business fundamentals drives every decision we make at Harris.
