It's another difficult day for U.S. stocks on Thursday: The Dow Jones Industrial Average (^DJI 0.13%) and the broader S&P 500 (^GSPC +0.11%) are down 1.35% and 1.33%, respectively, at 1:30 p.m. EDT. The Nasdaq Composite was down 2.10%.
For the past two days, my column has focused on the opportunity emerging markets represent, in broad terms. With the iShares Emerging Markets Index ETF down another 1.47% at 1:30 p.m. EDT, that's all the more true today.
Naturally, however, not every country, much less every security, is equally attractive. If you're reading this column, I will assume you are primarily an investor in individual stocks rather than an asset allocator. As such, I'm happy to highlight some names that appear to offer genuine investment value and are accessible to U.S. investors. Today, it's the turn of diversified natural resources group Glencore plc.
Glencore's Antapaccay copper mine, Peru. Source: Golda Fuentes. Republished under a Creative Commons license.
Glencore is one of the largest commodity producers and traders in the world. Technically, it isn't an emerging market company, as it is incorporated in Jersey (one of the English Channel islands), with headquarters in Switzerland. However, it has substantial operations in the developing world, and its biggest market is China.
That dependency has not helped investor sentiment regarding the stock, what with rising concerns about a slowdown in the Chinese economic engine. China is the mastodon of world commodity market, the largest consumer of iron ore, aluminum, and copper (among others); Glencore produces all three. What is certain is that commodity markets have suffered a rout that has some pundits arguing that the commodities "super-cycle" is over.
Another certainty is that the drop in demand for commodities is hurting Glencore. Yesterday, the company reported a nasty first-half loss, and the shares fell nearly 10% on the day, compounding a dramatic slide: Over the past 12 months, the stock is down nearly 60%.
However, one day prior to that, another perhaps more valuable piece of information emerged about the stock.
Value-oriented fund manager Harris Associates announced it has been hoovering up Glencore shares since June 30, lifting its stake from 1% to 4.5%, making it the group's fourth-largest shareholder and the second largest external active investor, behind Qatari sovereign wealth fund Qatar Holdings (9%).
(I suspect the bulk of BlackRock's 5.0% stake is passive; CEO Ivan Glasenberg owns 8.4% of shares outstanding.)
David Herro, chief investment officer, international equity, offered this comment to Bloomberg:
We like their copper position, we like their trading position. Their other metals don't seem to be anywhere near as impaired as iron ore. They are well-positioned [...] We have not invested in this as activist shareholders, we've made this investment as long-term value investors. The business at this price is substantially undervalued. We are a long-only value shop.
When Harris Associates' flagship Oakmark Fund initiated its position in Glencore during the third quarter of 2014, here's how it justified the purchase to its investors:
Like many companies in the mining sector, Glencore's shares have fallen over the past few years as commodities prices have weakened, due to a glut of new supply. At the current price of $5.56, we believe the market has overly discounted the effects of the lower commodity price environment, giving us an opportunity to buy Glencore at a compelling discount to our estimate of intrinsic value.
After giving the company credit for the expected ramp-up in production from large current investments, the company is trading at less than nine times earnings -- too low considering that approximately a quarter of those earnings come from the very high return trading segment, and the rest comes from long-lived and well run mining assets. In addition, we believe Glencore is managed by a smart and highly incentivized team (the senior leaders own billions of dollars of stock while often earning only nominal salaries). For all of these reasons, we find Glencore to be an attractive addition to the Fund.
(Incidentally, the only other time I highlighted an Oakmark Funds position was in June: Precision Castparts. On Aug. 10, Berkshire Hathaway announced it is acquiring the company at a 21% premium to the previous day's closing price.)
I would put Glencore toward the more aggressive end of the value investing spectrum because of its dependency on commodity prices -- this is no Precision Castparts. However, for patient investors with a genuine tolerance for volatility, I think the long-term reward could more than compensate for the risk.
