Under the Radar: Strategic Financial Screening Reveals International Opportunity

Several academic studies have recently examined buying undervalued stocks using tools like the Piotroski F-Score, Joel Greenblatt’s Magic Formula, and profitability factors. I have written about these studies in this column and in my weekly e-letter.

Rather than bore you with all the detailed and academic citations; I can summarize the results very quickly for you. Buying stocks that trade at low multiples of asset value and cash flows outperforms the market indexes. This approach can be very volatile. Most of the return comes from less than half of the number of stocks. There is a high failure rate for the companies that pass the initial value screens. Adding financial and quality filters to the list of cheap stocks based on earnings and asset multiples dramatically increases the return and margin of safety in value strategies.

Today, I decided to look at stocks that passed all the filters. I screened for companies that passed the Magic Formula Filters of high earning yields and high returns of capital. Then, I filtered out those with low profitability levels and Piotroski F-scores.

This produced a list of profitable companies with strong finances that are currently undervalued. I immediately noticed that the best bargains were outside the United States. This is unsurprising, given the huge performance gap over the past several years.

While running the numbers, I made a surprise discovery.

 Buying high-quality, undervalued U.S. companies has beaten the markets even during the past five tech-dominated years.

 Companies outside the U.S. (excluding China) have done even better.

 Given that there are far more bargain opportunities outside the United States than inside, there is a good chance that this outperformance will continue.

Ambev SA ABEV is a Brazilian brewer and distributor of popular beers like Budweiser, Corona, Stella, and others in Brazil, the Caribbean, and Central America. It also sells Pepsi PEP products in the same markets.

The stock has been volatile due to turmoil in the Brazilian economy and currency fluctuations over the last year. After declining steadily over the past few years, the stock is now trading at low multiples of the business’s cash flow. T

he business generates high operating profits, and the financial statements show a healthy company with the potential for continued improvements.

The parent company, Anheuser-Busch InBev SA, owns more than 60% of the company, so there is little question about Ambev SA’s staying power.

América Móvil, S.A.B. de C.V. AMX is a leading telecommunications company based in Mexico. It offers a wide range of services, including wireless voice, wireless data, and value-added services, across multiple countries.

 After a headline-driven rough year, this company is now a compelling opportunity that no one on Wall Street is even thinking about right now. The company has demonstrated resilience in its financial performance, with service revenue growing quickly despite currency fluctuations. Its continued expansion in Latin America and Europe and rising postpaid subscriber growth enhance long-term revenue visibility.

 Additionally, América Móvil benefits from its dominant market share in Mexico and other key regions, allowing it to generate stable cash flows.

The balance sheet is strong, and the majority owner, Mexican billionaire Carlos Slim, has deep pockets. At the current single-digit multiple of the business’s cash production.

 América Móvil is an excellent buy for patient, aggressive investors.

Vista Energy VIST, the Mexican oil and gas company, is another compelling opportunity. Vista is an independent oil and gas company headquartered in Mexico City, Mexico. Established in 2017, the company focuses on the exploration and production of oil and gas, with primary operations in Argentina and Mexico.

 Vista’s principal assets are in the Vaca Muerta formation within Argentina’s Neuquina basin. These assets make the stock a screaming buy for value-oriented investors willing to look outside the United States.

According to the few Wall Street analysts who follow the stock, it is a strong buy due to its exceptional growth potential, efficient operations, and strategic positioning in Argentina’s Vaca Muerta shale play, one of the most promising unconventional oil and gas basins outside North America.

Citigroup was just out last week with an updated buy ranking and price target that is well above the current price.

The company is profitable, in solid financial condition, and trades at bargain basement prices.

Latin America is way off Wall Street and the financial media’s radar screens. The instant experts of the internet have not yet surrendered their status as fiscal policy experts and nuclear engineers, and they are unlikely to discover that Latin countries have actual stock exchanges and economies involving more than all-inclusive resorts. These companies pass all the quality and financial strength filters and are undervalued. Owning a portfolio of overlooked international companies that pass all the filters has been a winning strategy, and I expect that to continue.