Global stocks for a world recovery
The road back won't be smooth, but international investor Sarah Ketterer has a few picks for an economic rebound.
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| Ketterer: "The reason we own fewer stocks is because the upside is so tremendous that we have a lot more conviction per stock than we did in the bull market." |
NEW YORK ( Fortune) -- For value investors like Causeway Capital Management's CEO Sarah Ketterer, last year's punishing market quickly became a bargain-hunter's paradise.
As confidence-crushing plunges cratered stocks around the world last fall, Ketterer went on a buying spree for her Causeway International Value fund - and she thinks investors should be getting in too.
"In our fund, we own just shy of 60 stocks internationally, and they're the highest-quality companies we've ever owned. They're the ones we wish we could have owned for the last 15 years. Now they're finally down in buying range," she says.
On Ketterer's shopping list: undervalued, dividend-paying companies with strong balance sheets in sectors that pick up early in economic recoveries.
By focusing on industry leaders, she fills her portfolio with companies she believes are best positioned to grab market share from peers who won't survive the downturn, while paying their shareholders to wait out the storm.
The road to recovery won't be smooth, she says. But Ketterer is convinced that global central banks' aggressive policies to boost flagging economies should fuel stocks' comeback in the latter part of 2009.
Since bull-market gains tend to be concentrated upfront, she has positioned her portfolio for a rebound. Over the last few months, she has pared defensive stocks to buy out-of-favor sectors that were trounced in 2008 sell-offs.
"Cyclicals, capital goods, and industrials were badly hit last year because they're considered economically sensitive," she says. "Now they're by far the most attractive opportunities by price-to-book and price-to-earnings ratios."
One battered sector Ketterer isn't buying is financials. Exposure to troubled banks like the Royal Bank of Scotland was one reason Causeway International Value slid sharply last year, ending 2008 down 42%. (Even with that drop, CIVVX beat out more than half of its peers in Morningstar's World Stock category.)
But after avoiding energy stocks for the first half of 2008, Ketterer started buying when oil prices plummeted. Favorites include oil-services companies like French outfit Technip (TKPPY) and Norway's Aker Solutions (AKKVF), as well as Transocean (RIG) for Causeway's new Global Value fund.
"These are well-capitalized companies, and their customers are the big exploration and production companies," says Ketterer. "Fluctuations in oil price don't make that much of a difference to their spending plans."
Ketterer also finds values in the materials sector, including Dutch paintings and coatings producer Akzo Nobel (AKZOF). "What we like about them is that they have a 7.5% dividend yield, and they're a company that has money to pay it," she says. "We're insisting to clients that it doesn't matter when this recovery occurs as long as it's not longer than two years, because you're getting paid to wait."
Other dividend-friendly picks include Japanese robotics maker Fanuc (FANUF) and Dutch company ASML Holding (ASML), a leading producer of lithography systems used by semiconductor chip manufacturers.
As far as industrials go, Ketterer is bullish on Vinci (VCISF), a French construction and toll-road operator that should benefit from infrastructure investments, and South Korean shipbuilder Hyundai Heavy Industries ($163), whose stock was slammed in 2008.
Says Ketterer: "It's one of our favorite stocks in terms of upside potential in the next two years, because they're the biggest and best in the world at what they do."
That leads to what Ketterer sees as her biggest risk: protectionist policies, especially in the U.S., that could thwart economic recovery. Still, she remains bullish overall - so much so that she's whittled her international fund's portfolio from 70 to almost 60 names.
"The reason we own fewer stocks is because the upside is so tremendous that we have a lot more conviction per stock than we did in the bull market," says Ketterer.
So far, the strategy's paying off. From November 17 through year's end, Causeway International Value gained 13%.
--An earlier version of this story incorrectly identified ASML Holding as a Norwegian company. ASML is a Dutch company. 
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