How the market is underappreciating the intrinsic value of re-opening stocks

Abhay Deshpande, founder & chief investment officer of Centerstone Investors, joins Yahoo Finance to discuss investing in European stocks and the re-opening trade.

Video Transcript

BRIAN SOZZI: We've seen bearish action in European markets today, as investors begin to fret about suspended use of AstraZeneca's COVID-19 vaccine. So is a bigger selloff right around the corner? Let's put this question to Abhay Deshpande, Founder and Chief Investment Officer of Centerstone Investors.

Abhay, good to see you again here. So I'll put that question to you. Do you think we're at risk of seeing a broader selloff in European equities, because realistically, if you pull back on an AstraZeneca vaccine, that could delay the economic recoveries?


ABHAY DESHPANDE: Yeah. I think a broad selloff, like a major one that would be something to position for, is, I find it unlikely. I think that this is basically just maybe delaying things that were already delayed. So I don't find that much to worry about yet. But you never know. I mean, this-- they've been-- I think the vaccine itself seems to, for what, if you just look at the data, seems to work fine. And what they're worried about seems to be very rare. So this is probably driven a lot more by politics than anything else with the UK.

MYLES UDLAND: So Abhay, you know, the headline for me in your note, potential for non-US markets rarely looks as compelling as it does right now. Break that down for us, though. You know, I think as US-based investors, we kind of view everything else, the rest of the world's monolith. It's obviously not that. How are you thinking about geographical opportunities, sector opportunities, and you know, along those lines?

ABHAY DESHPANDE: Yeah, I think it's been the right thing to do, which is to focus on the United States for the last almost decade. Because most of the value creation has occurred in US large cap tech names and, you know, mostly to the point, these stay-at-home names that you've seen the last year or two.

Now you know, I've been doing this long enough that I can appreciate that markets often overcorrect in one way or the other and eventually rebalance. And so it's easy to forget that actually for most of the 2000s, the European markets, like much of the '90s and 2000 European markets, did much better than US markets. Small cap did much better than large cap.

And there are various drivers for all of these things. But for Centerstone, the starting point is-- for now, anyway, because that's all that matters is what's now-- is that the valuations are much more attractive. And the valuations are, because of this unique moment of economic uncertainty and a fiscal policy and monetary policy all working in our favor, there's this unique moment to buy cheaper stocks overseas that have been lagging for 10 years, while at the same time, they're starting to face a recovery in the near future.

So you have earnings growth potential, you have lower valuations, and so you have, you know, what I would put in the bucket of a cyclical bounce that can lead to very, very substantial returns, if you have some patience.

BRIAN SOZZI: What country, Abhay, do you think has the cheapest valuations relative to their future growth potential?

ABHAY DESHPANDE: We look at it more by sector than country. Because, you know, most companies themselves are global in nature. Even, you know, as much as there's been a focus on US investing, at Centerstone, we often tell our clients, you know, if you're index is S&P 500, you're a global investor, and you know these things too.

And the same holds true across the world. You know, we have companies all over the world that really are somehow or another linked to global economic prospects and trade. Some examples, you know, we own the Frankfurt Germany Airport Operators. It's called Fraport. The stock went from 100 to 30. Just on the basis of its asset value, it's worth, you know, well in excess of 50 euros, which is where it's trading now. But it's still trading at half of the value, market value that it was at its peak. However--

BRIAN SOZZI: Abhay, is that a recovery-- is that a bet on, is that a bet on a global recovery?

ABHAY DESHPANDE: Yeah, that's basically an entire portfolios of COVID recovery basket at this point. I mean, that's, like, if you're, you know, if you're kind of looking at the market now-- I know it's popular to kind of separate it between tech and value and all, but it's really, it's stay-at-home versus not stay-at-home stocks. That's the trade.

And it seems fairly obvious to me that, you know, the better trade seems to be the trade that's opening up now, which is people getting out of their homes. So clearly, airports, casinos. You know, we own a lot of different-- we own a school bus operator in the United States that trades in London. You know, these stocks are veritable gold mines-- or, I guess, given my audience, Bitcoin mines-- where you have substantial room for value, or price appreciation. Because the stock markets are still very, very, very, you know, they very much under appreciate the intrinsic values of these businesses.

So we're finding them all across the board. I wouldn't say it's just one country or, you know, one sector, but, you know, more or less it's on that theme of stay at home, which has, of course, had a huge rally in the last few months.

BRIAN SOZZI: Nothing wrong with trying to find some gold mines. We'll leave it there for now. Abhay Deshpande, Founder and Chief Investment Officer of Centerstone Investors. Good to see you.