PIIGS won't fly, but European stocks might

Where Templeton's Norman Boersma is finding global bargains

Sonita Horvitch 21 July, 2010 | 6:00PM
Facebook Twitter LinkedIn

Norman Boersma, executive vice-president and director of research at Templeton Investment Management, has taken advantage of the weakness in the European equity market to selectively add to his holdings there.

A veteran global value manager, Boersma says that concerns about the government debt loads of the so-called PIIGS -- Portugal, Italy, Ireland, Greece and Spain -- put considerable pressure on both European bonds and stocks in May and June.

"This provided an opening to buy, for example, European bank stocks, which were cheaper than some of their global counterparts." These stocks were down significantly year-to-recent close in Canadian-dollar terms, he says. "By contrast, U.S. banks put on a strong showing."

Concerns over European sovereign debt were also responsible for the sharp pullback in the global equity market over May and June, says Boersma. After an exceptionally strong rebound in 2009, the market was poised for a correction, he says. "The PIIGS provided that impetus."

Year-to-recent close, the benchmark MSCI World Index recorded a negative total return of 4% in Canadian-dollar terms. Europe, which lost 9%, was by far the weakest performer in Canadian-dollar terms, partly due to the pressure on the euro. Asia (including Japan) lost 7%, while the United States did relatively well with a negative 1.4% total return.

There was, says Boersma, "investor panic in May and June" about Europe's macroeconomic challenges. "But if you talk to the management of European-based companies, as we at Templeton do, you get a more positive picture." The companies, unlike the governments, are in good financial shape, he says.

Index 1Y 3Y 5Y 10Y
MSCI World 1.4 -11.0 -2.2 -3.8
MSCI Europe -2.7 -14.5 -2.0 -2.4
Total returns, in Canadian dollars, for periods ended June 30

In energy, investor concerns about the major oil spill in the Gulf of Mexico provided an entry opportunity in a number of European and U.S. energy-services stocks, says Boersma.

These stocks were hit hard on the assumption that offshore drilling around the world would be halted, and Boersma believes that the drillers still face significant short-term challenges. But the demand by the energy industry for equipment and servicing will continue, he adds, and "in the longer-run, offshore drilling in the Gulf will resume."

At Toronto-based Templeton Investment Management, part of Franklin Templeton Investments Corp., Boersma is responsible for managing $8 billion, mainly for institutional investors. The typical global equity portfolio has 100 names.

The Templeton group combs the world for stock bargains. The managers' and analysts' finely tuned discipline is to look ahead five years and build a financial model of target companies to evaluate each company's ability to grow book value and earnings over that period. The model then uses traditional valuation measures to assess the merits of each of its targets.

Geographically, the biggest weighting in Boersma's global portfolio is in Europe at 54%, which represents a modest increase from the beginning of the year. Here, the main country weightings are the United Kingdom at 16%, Germany at 8%, France at 8% and the Netherlands at 6%. Of the other main global regions, North America represents 28% and 13% is in Asia.

The largest sector weightings include financials (17%), consumer discretionary (16%), information technology (12%), industrials (12%), telecommunications (10%) and energy (9%).

Norman Boersma

A Dutch-based global energy-services provider, SBM Offshore N.V., is an example of an energy-services stock that Boersma favours. The company supplies a wide range of products and services to the offshore industry worldwide, including engineered products, offshore terminals, semi-submersible drilling platforms and specialized vessels. The stock, says Boersma, is down some 12% in the year to date. It trades at some 11 times estimated forward earnings per share and "offers value."

In other sectors, Boersma notes that global pharmaceutical companies, which comprise the bulk of his holdings in the health-care sector, "continue to deliver strong cash flows, good dividends, and trade at low P/E multiples." Many of the global brand-name companies are, he says, challenged by patent expirations. An exception is the U.S.-based global biotech giant, Amgen Inc.   AMGN. "This company has a healthy pipeline of new therapies," says Boersma.

He cites the example of Amgen's therapy, known as Denosumab, to treat bone loss in humans. This can address a range of conditions such as osteoporosis, bone metastases and rheumatoid arthritis. "It is considered to have fewer negative side effects than some competing drugs," says Boersma.

The European Commission has given marketing authorization to Amgen for the brand name of this Denosumab drug, Prolia, he says. "As with any new drug, the take-up of Denosumab is likely to be slow, but the long-term outlook is positive."

Amgen's stock trades at 10 times estimated forward earnings per share. "The company has a decent growth profile and there is a possibility that the market could accord it a higher P/E multiple."

The global portfolio also has holdings in other major pharmaceutical names including: GlaxoSmithKline PLC (which trades on the New York Stock Exchange under the ticker   GSK) and Merck & Co. Inc.   MRK.

In the industrial sector, which tends to be more cyclical, Boersma considers that a leading UK-based global packaging company, Rexam PLC, offers good value. The company provides packaging for a range of consumer products such as pharmaceuticals, food and beauty supplies. "Its high-end bottles and cans command good margins." The stock trades at 11 times estimated forward earnings per share, and has a dividend yield of 2.5%.

Boersma has sold his holding in the U.S.-based consumer staples company, Dr. Pepper Snapple Group Inc.   DPS, which bottles and distributes non-alcoholic beverages in the United States, Canada and Mexico. The company has strong brands and is a good cash-flow generator, says Boersma. But the stock had a good run and was trading at 18 times trailing earnings per share, "so I sold it."

Facebook Twitter LinkedIn

About Author

Sonita Horvitch

Sonita Horvitch  

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility