Across the Atlantic, Stocks Look Cheap

Oakmark International's David Herro finds some bargains. But Japan still looks touch and go.
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Every day that the


jumps another 100 points and some random Internet stock goes through the roof, it gets harder to find a bargain in the U.S. stock market.

So if you're trying to rustle up some cheap stocks, you're going to have to head overseas.

Many international markets have trailed the U.S. this year. The

S&P 500

is up 9.5% this year, and the


has gained almost 20%. Meanwhile, European stocks are down. Asia has been weak from SARS, and Japan is still Japan.

Value manager David Herro of the

(OAKIX) - Get Report

Oakmark International fund is a good guide for investing abroad -- his fund's three, five and 10-year returns rank in the top 5% of all overseas offerings. In today's column, Herro weighs in on where he's shopping and what he's avoiding.


On the surface, Europe doesn't look like such a great place to invest your money. The economies of Germany, Italy and the Netherlands appear headed for recessions. The European Central Bank has been slow to cut interest rates. And some countries -- particularly Germany -- are slow in reforming their rigid labor and social policies that make it tough for companies to lay off workers and cut costs during tough times.

But all these worries make this region of the world prime hunting ground for inexpensive stocks. And Oakmark's Herro is taking advantage of the market weakness. "Today we're much heavier in Europe than we were two or three years ago," he says. "Three or four years ago, European blue-chips were prohibitively expensive. But today these stocks are cheap, especially given low inflation. Just look at the top 10 holdings in the fund."

Indeed, Oakmark's largest holdings are some of the best-known names in the U.K. and Europe:




Vivendi Universal

(V) - Get Report



(GSK) - Get Report



(DEO) - Get Report


Some of these stocks are sporting dividend yields of 3% and over -- about double the yield on the S&P 500 right now. And if a foreign company's stock also trades here in the U.S., then its dividend is eligible for the new 15% dividend tax rate. That's another thing that makes those yields enticing.


Herro's attraction to European stocks is evident in his fund's allocation to those regions. Three-quarters of the $1.6 billion in assets are invested in that part of the world.

And his fund's small 9% weighting in Japan, compared with its 21% weighting in the benchmark MSCI-EAFE index, illustrates Herro's belief that the country will continue to struggle. The stock market is trading near a 20-year low, and the economy is not improving. And the country hasn't done anything drastic to get out of that funk.

Ultimately, Herro looks for solid companies whose stocks are undervalued. And he's still having trouble finding those in Japan. "The purpose of a publicly traded company is to make money for the shareholders -- not be part of an industry group, to employ people or make new products," Herro says. And Japanese companies "foolishly allocate capital. What they do makes cultural sense. But it doesn't make economic sense, like sitting on huge sums of cash instead of buying back stock."

Elsewhere in Asia

However, Herro is attracted to other parts of Asia, despite the threat of SARS to the region's growth. "Before SARS, the China region was booming for a number of reasons: There's a large amount of foreign investment, and Chinese consumers are really starting to spend," he says. "SARS has been a temporary setback, but companies will continue to invest in China, and people will get back to spending again."

Although it's tough to find Chinese stocks to buy, you can invest by buying Hong Kong companies with exposure to China, like retailer




"People wonder where growth in the world will come from in the next five to 10 years? Right there."