Looking in the Club Med Bargain Bin

With the Ibex having a pretty shoddy week (and half the world is off drinking caiprihinas by the pool in Ibiza and Nice right now!) I thought it would be good to start casing around for bargains in Club Med. I've drawn up a list of some potentially interesting Club Med names.

The Athex, ironically, hasn't had too bad a time of late (relatively speaking) and given how silly cheap the index is there may have formed a bottom for the moment. I am working on Greek names separately - i have a handful of names there that I am gonna do some initial digging on.

Anyway, without further ado here are eight names from Portugal, Italy and Spain (yeah PIS) that have caught my eye.

1980s Mexican Currency Crisis and The Stock Market

I came across this in the July 2010 Bestinver investment letter

"Towards the end of the 1970s, Latin-America experienced a boom motivated by a fast growth

of the credit that streamed through North-American banks thanks to the surplus generated

by the OPEC. From 1980 onward, the petroleum price stopped rising and originated a credit

crisis. The various governments tried to interrupt it in a very similar way as how nowadays

the occidental countries are trying to do: through public deficit and by printing money. As a

consequence of these policies, the currency started to lose purchasing power. If we take the

situation in Mexico as an example: between 1979 and 1987, the currency lost 95% of its value

in reference to the dollar. In this situation... investment in real assets through the stock market turned out to be the best alternative.

At first, the currency depreciated more rapidly than the stock exchange. This is why the

Mexican market hit the bottom in dollar terms in 1983. Nevertheless, and after a period during

which the stock exchanged is dragged by the panic of the currency devaluation and the lack

of confidence in the system, the investor realizes that the companies continue working and

generating positive results (the society continues needing services and products to live) thanks

to their capacity of incorporating the new situation into their production process (moving the

new costs to their final prices and maintaining their capacity to generate added value intact).

This way, the Mexican market hit the roof soon, in 1987, multiplying by 160 in nominal terms

at the beginning of 1988 and getting practically at level in USD. Notwithstanding the stock

market crash that same year, we see how the purchasing power of the savers was maintained

through the stock market, while the investors in bonds (denominated in local currency) or in

Mexican pesos lost 95% of their investment permanently."

Here's some charts of that performance based on the above table. Now I am not one massively into technical analysis but what is interesting is to see how the bottom range in both USD and MXN acted as a fairly steady support through the period while the top-end of the market just swung around like crazy. I suspect while this may have some stuff to do with people looking at buying at long-term moving average supports it is probably more to do with folks stepping in to buy at an inflation adjusted support level for the broader index based on book value/replacement cost (Tobin's Q). Clearly buying in when people are totally freaked out and at the bottom of the trading range would seem to be a decent long-term strategy.... assuming (and it's a big assumption) you can figure out the bottom of the trading range/where the support level is.

Here's a similar chart, although on a shorter time line from CIQ (their data for the Mexican IPC index only goes back to '83) and which only shows the monthly close rather than the range... as you can see it looks pretty similar but doesn't show the low-end support.

The Pain in Spain

Index earnings for the Ibex have peaked out in quite a large way following the Lehman implosion and have not come close to recovering, hence the Hussman Peak PER is very depressed currently (5.1x as of market close Fri 13th July). That is a pretty stark contrast with the SPX where at the index level earnings staged an impressive post-Lehman recovery... and at the index-level at least the US large cap space seems pretty fairly valued.

On a Hussman basis the Ibex is trading 2 standard deviations below its 20-year average, which is pretty phenomenal. Even if things go pretty shoddy for the Iberians one would imagine that there will be some kind of multiple expansion over the coming three years to at least take the market to even one standard deviation below its twenty year average. I.e. a still undemanding 10x peak earnings. Assuming some kind of recovery in earnings - even be it because things simply go to rubbish from god awful - that would imply some potential upside.

At 9.6x the Ibex's TTM PER is higher than the Hussman PER but still flags a market trading at very depressed earnings: about 42% off its twenty year average multiple. (The collapse in earnings back in 2003 kinda distorts the average and standard deviation measures, so I have chosen to go with the median value over the period instead.)

Given how shot-to-pieces earnings are currently in Spain, PBR may be a better way of looking through the prism. Again, things look cheap: 0.8x... although the riposte to all this is how much is the book value of the banks, industrials and real estate plays need to be written off by. Eyeballing the heat map suggests these guys have already taken a fair pounding, although they do continue to make up a good chunk of the index. Still at two standard deviations below the long-term average of 2.4x I would say quite a lot of write-downs look baked into the price right now.

Now clearly this market is not nearly as cheap as Greece but 5x peak earnings is still pretty reasonable (even if it may take a long time for the market to get back to topping peak earnings, although a dose of hyperinflation assuming the Iberians get booted out/leave the Euro could get them there quicker).

Source: CapIQ

SPX Hussman PER

Hussman PER for SPX since 1980

The median for the time period is 16.7; mean is 16.9.... i.e., pretty much identical

The market is around 16x currently, so certainly on this reasonably long-term metric US stocks on an index level don't look piss cheap right now. Of course, at the micro-level there could be bargains. But buying the index probably isn't a ticket to wealth... or at least a phat pension right now.

My guess is wait till September (see page eight) for the Eurocrats to come back from holiday and balls up the financial system in Europe leading to a collapse in Euroblx and triggering some kind of global sell-off for things to get interesting on a broader level in the US.