For Lisa Myers, a lagging European recovery is great news.
That’s because plenty of great stocks are discounted.
“A lot of European companies are global, so more than 50% of their earnings come from outside Europe,” says Myers, the executive vice president of Templeton Global Equity Group and manager of Templeton Growth Fund. “But that has not prevented them from being devalued substantially, and not getting much credit for what they’re earning.”
She’s confident these stocks will eventually bounce back, since Europe and the U.S. had similar earnings growth from about 2002 to 2007. That happened despite Europe’s tighter labour market policies, such as restrictions on firing and outsourcing, and lower margins.
So, as the continent crawls toward recovery, she says, “We should see those earning gaps close, and at current valuations, that’s a compelling story.”
Read: Europe bounces back
In terms of sectors, she’s been overweight financials. “Restructured banks in Europe look interesting,” because their price-to-book ratios are currently below one, which is “not reflective of their long-term sustainable returns on equity.”
She’s also been overweight healthcare for many years. Over the last decade, more generic drugs have come to market and competition has increased. That’s pushed stocks lower, and “at that point we bought into the larger pharma companies because we saw bloated cost structures and the opportunity for consolidation,” she says. Aging populations, growing healthcare access in emerging markets, and Obamacare in the U.S. were also factors.
More recently, she’s bought medical equipment and specialty pharmaceuticals companies, some of which have been taken out by larger players.
Other attractive sectors include industrials and airlines, she says.
And, “if structural [labour] reform occurs in Europe, that will be an added boon.”
Unfazed by oil
Oil price volatility doesn’t concern Myers.
“We don’t own any leveraged E&P [exploration and production] plays,” she says, because “their cash flow comes down as the price per barrel comes down, and their indebtedness continues to rise.”
Instead, she prefers oil services companies like Halliburton and Baker Hughes (in fact, the former is taking over the latter). “We understand a plummeting oil price will have negative impact on these stocks. So we decide what a normalized oil price [will be] going out several years, and then buy companies we think will not only weather the storm, but also be sustained beneficiaries.”
She bought Halliburton and Baker Hughes “when there was question about too much pumping going on, and the stocks started to do poorly. [But] they were able to manage that situation and do well.” She adds she got out of those positions when prices peaked.
Oil service firms are critical in boom and bust times, Myers says, “so while these companies are highly correlated [to the oil price], the idea that their businesses completely disintegrate is not realistic. They’re able to participate at any point on the cost curve.”
So, the current environment provides opportunity: “We’re waiting to buy them at a discount.”
Myers has been underweight metals and mining companies since 2007 – she bought them during the tech bubble, and started selling in 2006, prior to their peaks. “Those valuations didn’t make sense to us, knowing the cyclicality of the sector.” High commodities prices spurred a glut of capital expenditure, and now there’s too much supply. “There’s a lot of new capacity that will have be absorbed.”
She also dislikes consumer staples. “They became a great play on [the growth in] emerging markets, but then when people wanted to retrench, staples became a place to retrench to. So they became an all-weather sector.” But the sector’s margins are slim, companies have low pricing power and there hasn’t been much innovation, so she says the high valuations aren’t justified.