International SIF: Shopping for bargain US amp;amp; Euro stocks

Since October, UK stock markets have fallen quite sharply. A lot of this has been blamed on Brexit uncertainty, and I suspect this probably is one cause. But it’s equally obvious that many businesses listed in the UK and overseas won’t be affected by the UK’s attempt to leave the EU.

I think it’s fair to say that other concerns are weighing on the market too, such as rising US interest rates and the eventual end to cheap money that this seems to imply. To get a rough picture of what global markets are doing, I’ve used Stockopedia’s chart feature to put five leading stock indices on one chart. It’s clear that markets are falling all over the world:

My International SIF portfolio has not escaped unscathed. At the time of writing, this portfolio had fallen by around 19% so far in 2018:

(The blue line is the value of the portfolio, the orange line is the original cash deposit)

Happily, there is some good news for me. An analysis of the current International SIF stocks suggests that in aggregate, they’re cheaper, faster growing and have a higher yield than the market average (the dark blue is my portfolio, light blue is market average):

This doesn’t guarantee that my selections will bounce back when market conditions improve. But it does perhaps suggest that the odds are in my favour, if I hold onto the shares long enough.

Let’s go shopping

As I explained recently, I don’t plan to make any changes to my rules-based strategy to cope with Brexit or (almost) any other situation. So with that in mind, I’m going to carry on picking new stocks for the International SIF from my screen results.

Let’s start with a look at the portfolio as it stood on 19 December:

Apologies if the numbers are hard to read. My top-performing stock remains Hong Kong-listed China Resources Cement Holdings, which is up by nearly 50%. Down at the bottom is troubled groundworks contract Keller, which is down by about 50%.

One aspect of the portfolio I’m actively changing is its geographic distribution. Here’s how things stood ahead of this update, versus my target allocations:

Because of the mismatch with my target allocations, I’m only looking for new US, Canadian or European stocks this month.

Here are the three companies I’ve added to the International SIF from my screening results:

• Steelcase Inc (NYQ:SCS) – this £1.3bn US firm makes office furniture and related items. It operates in both the Americas and Europe.

• Muenchener Rueckversicherungs Gesellschaft AG (ETR:MUV2) – more simply known as Munich Re, this £25bn German firm is a major global insurance group.

• LPL Financial Holdings Inc (NSQ:LPLA) – a mid-cap NASDAQ firm which operates a broker-dealer investment platform and a network of financial advisors.

Steelcase Inc (NYQ:SCS)

Steelcase is a maker of fairly on-trend office and workplace furniture. The company’s brands include Steelcase, Coalesse, Turnstone, Smith System and AMQ. You can see some examples here.

When I first looked at the Steelcase StockReport, the first thing that struck me was that the company must recently have received an unsuccessful bid. Why else would the shares have risen by 24% in two days in September, before falling back to where they started?

However, as far as I can see from the news feed, this hasn’t happened.

The sharp rise appears to have been triggered by the group’s Q2 results on 20 September. These revealed that revenue rose by 13% (8% organic) during the second quarter, while orders during Q2 were 12% higher than during the same period a year earlier. Operating income for the quarter rose by 30% to $67.9m.

The outlook for the remainder of the year was also impressive. A “positive outlook for EMEA and Asia Pacific” is expected to deliver organic revenue growth of 11%-15% during Q3. Earnings guidance for the full year was lifted to between $1.10 and $1.15 per share.

The previous consensus figure was $0.92 per share, so this represents an increase of around 20%. The impact of this upgrade is shown on Stockopedia’s very useful broker consensus trend chart:

Steelcase’s StockRank of 98 suggests that there’s not too much wrong with this business. A look over the numbers seems to confirm this view. Operating margins and ROCE have been fairly stable since 2014, and free cash flow has generally been good.

The dividend looks affordable to me and earnings are expected to grow by another double-digit percentage in 2019/20.

Based on all of this, Steelcase’s forecast P/E of 11.4 and dividend yield of 4.3% seem like a decent entry point to me.

Muenchener Rueckversicherungs Gesellschaft AG (ETR:MUV2)

This German insurance group has a £25bn market cap and operates in Europe, Latin America, Asia Pacific and Africa. Better known as Munich Re, its operations include almost all types of retail and commercial insurance.

I won’t pretend to evaluate this large and complex financial business in any kind of detail. But the headline figures seem to suggest that the group has struggled to grow in recent years, in much the same way as some large UK insurers.

Despite this, profitability has remained stable, with return on equity averaging 9% since 2013. Cash generation also appears to be good and has consistently covered the dividend.

Stockopedia classes the stock as a Conservative Turnaround, which seems fair to me. I’d be happy to buy on this basis, as earnings are expected to recover over the next two years. The current valuation looks fairly undemanding and should at least provide an attractive income:

LPL Financial Holdings Inc (NSQ:LPLA)

LPL Financial Holding is a broker-dealer and investment custodian for financial advisors. Essentially, this firm seems to provide the all of the technology, financial products and trading tools that financial advisors need to invest their clients’ cash.

According to the group’s website, it has $681bn of “advisory and brokerage assets”, 16,174 financial advisors and 4,101 employees. Gross profit in the third quarter was $39m.

I’ve not heard of LPL before, but it seems to be comparable to TD Ameritrade, which has client assets of $1.3 trillion and nearly 10,000 employees.

Interestingly, LPL appears to generate much more attractive returns than its larger peer. LPL’s return on equity has averaged nearly 21% over the last six years. The equivalent figure for TD Ameritrade is 16.6%.

LPL’s StockReport figures suggest the business is in good health, with modest debt, decent margins and strong cash generation. The obvious risk would seem to be that the stock market slowdown will continue, resulting in investment outflows and reduced levels of financial adviser activity. However, this isn’t the kind if thing I try to predict.

As things stand, earnings are expected to double from $2.59 per share in 2017 to $5.20 this year. A further increase is expected in 2019:

Based on these forecasts, the stock’s valuation looks quite appealing:

LPL Financial Holdings is the third and final stock I added to the International SIF folio in December.

Next year…

This article is due to be published during the Christmas week, so I’d like to thank you for reading this year and wish you all the best for 2019.

I’ll be back slightly later than usual next week, with a review of my main UK SIF portfolio’s rather mixed performance in 2018 and some potential stock changes.

Stockopedia