David Herro Finds Value in Europe and Japan
David Herro, chief investment officer of Harris Associates, was interviewed as part of Barron’s eighth annual Art of Successful Investing conference. The conference was host to several noteworthy investors including Felix Zulauf, Daniel Fuss, Scott Black, Fred Hickey, Meryl Witmer, Patrick Neal, William Priest and Marc Faber [link to article].
Herro searches for investment bargains created by economic macro fears. Herro believes that volatility and instability moves shares from their basic value. As an example, Herro said a company like Daimler AG (DDAIF) which produces Mercedes vehicles, sells product all over the world, trades at a reasonable valuation with net cash on its balance sheet to help it get through the current weak period; so you’re getting quality at a low price.
Herro stated that ground zero of the price destruction has been in financials. He looks for some basic things in stocks including a good, safe capital position. He provided examples of French bank BNP Paribas SA (BNPQY) and Intesa Sanpaolo (ISNPY) in Italy which are strong commercial banks in their local regions.
Regarding Japan, Herro said that it hasn’t been this cheap for this long of a time. They look at price to book value, but also return on that book value. The return historically had been quite dismal, but we are starting to see better returns coming from “blue chip” Japan such as Toyota Motor Corporation (TM) and Canon Inc. (CAJ), Herro said. They are doing a better job of increasing their margins and utilizing their cash, he added.
Herro said Canon earns good profits and has a return of equity probably greater than 15% and generates good free cash. CAJ has been using the cash to expand into emerging markets and buy back stock (10% of the shares outstanding in the past year or so). If this behavior becomes more widespread in Japan it could lift the market, he added.
Herro commented on Toyota which has had recall problems, which were followed by the Japanese earthquake and Thai floods. He believes these are all temporary problems. Toyota should benefit from being a low cost producer and a leader in fuel efficient technology, along with being cash rich. It is also being managed by a modern business thinker, Akio Toyoda (the grandson of the founder).
The interview continued with Herro discussing China where he finds it difficult to find value because the quality companies are expensive and the low priced companies are “wards of the state.”
Earlier this year Herro touted several European financials which subsequently had big moves to the upside [link].