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By Christine Benz | 09-08-2011 12:50 PM

Hunt: Value in Large-Cap European Stocks

Tocqueville's James Hunt believes that worries over European financials have created opportunities to buy firms with great cash flows and solid prospects at reasonable prices.

Christine Benz: Hi. I'm Christine Benz for Global markets have sold off sharply during the past month and a half, but at least one bargain hunter says he is seeing some opportunities. He is James Hunt. He is portfolio manager for Tocqueville International Value.

James, thanks so much for being here.

James Hunt: It's great to be here. Thank you.

Benz: So, James, it has been a bruising sell-off since late July, but you say that you're actually finding some pockets of opportunity in the market, in international stocks on which you focus. Can you talk about what those are?

Hunt: Well, moments like these are really attractive to us because moments of fear and moments of volatility tend to create the greatest pricing dislocations, and they present us with opportunities to find diamonds in the rough. So, we actually do think it's an interesting time. We think that the markets have clearly begun to discount a recessionary scenario, and some stocks, particularly economically sensitive stocks, have declined 40% or 50% in price from their recent highs. And we think those look like very good values compared with their cash flows over the course of an economic cycle.

So, in moments like this, particularly, when markets are moving very fast, the first place we look for ideas is in our existing portfolio. These are companies that we've already made the decision to invest in, that we like qualitatively, where we understand extremely well the business and the cash-generation capabilities.

So, for example, one stock that we have owned, which we've added to recently is AkzoNobel, which is a Dutch chemical maker, which makes chemicals that go primary into paints and coatings. It's a mid-cap stock. The company has generated returns on capital in the double digits during the last 10 years. Its free cash flow generation has been around 9% of market cap on average for the last 10 years. It's a very attractive company, with a 4%-plus dividend yield. It's been marked down in this sell-off to levels that reflect a significant fall back in business activity. So, that's one example.

Benz: So, in terms of the banks. The banks have obviously been under a huge cloud, especially in Europe. Have you been looking at the banks and do you think that things are cheap enough and attractive enough currently or are you staying away?

Hunt: So, that's a really good question. It's a very relevant question because we are first and foremost contrarians and then value investors. As contrarians, things like a steep decline in an industry get us really excited. So, the European banks are example of something to which we would typically be very attracted.

Having said that, part of our investment discipline is to buy businesses that we understand, that are transparent, and that are not highly leveraged. And so, we also typically have an aversion to financials and we're typically very underweighted financials relative to the indexes. 

To answer your question specifically, the way we're trying to take advantage of this extremely negative sentiment toward the European financials is to find businesses that are down and out-of-favor because of those fears, but from an economics of business standpoint, don't have the same vulnerabilities as the banks.

So, one example of a company that we've actually taken a toehold in recently is, Aflac, which is sort of an odd creature. Aflac is a U.S.-listed company that has most of its business in Japan, and has a very large bond portfolio as an insurance provider. And the reason the stock is down is because of its exposure to the European bond market. So, those are the same forces that are affecting the banks. The stock is down around 50%. It's selling at around 6 times earnings and is a fantastic business. And we have a strong view that once the European bond market normalizes, which should happen as fears about the banks are alleviated, the stock should recover.

Benz: So, James, you mentioned Japan, and you were very active in buying there during the natural disaster and subsequent nuclear accident earlier this year. Have things played out in Japan as you thought they would, and do you still think there is upside for your holdings in Japan right now?

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