2 Global Value Stocks to Buy

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One of the more interesting and useful academic papers about the markets was done by Robert Novy-Marx and the University of Rochester. The original paper, about value stocks, was called “The Other Side of Value” and was published in June 2012. Marx discovered that companies that had high gross profits as a percentage total assets performed as well as those with traditional value metrics such as price-to-book value.

In 2013, Novy-Marx released a further study of gross profitability as an indicator of potential market gains and found that if you combined the gross profits as percentage of assets with price-to-book, you would have a portfolio that beat the overall market. In addition, the profitable companies trading below book value suffered lower drawdowns than the broader market and more traditional strategies.

We can use this model to search for quality value stocks trading below book value around the world, as well as in the United States.

After the strong performance of domestic markets last year, many think that the international markets will lead the way in 2014. There is a feeling that many European and Asian economies are a couple of years behind the U.S. and will begin to gain ground, and thus those equity markets should begin to outperform U.S. markets for a period of time. I have no idea whether this macro picture will play out, but I do know that the value stocks that fit the Novy-Marx qualification of profit and book value can give us superior performance — no matter where they are located.

ArcelorMittal (MT)

ArcelorMittal (MT) is an integrated steel company based in France that sells to a wide range of industries in more than 170 countries around the world. Over the past year, the company has earned gross profits of $74 billion on total assets of $122 billion, so it qualifies as a high-profit company using Novy-Marx's definition. MT stock currently fetches just 65% of book value, so it’s definitely a bargain issue at this price. Anticipating a stronger steel market in 2014, brokerage and research firm Cowen recently raised its rating on MT stock to “buy,” and also upgraded U.S. Steel (X).

KT Corporation (KT)

KT Corporation (KT) is a telecommunications company in Korea. KT Corp. offers traditional fixed-line services as well as voice over Internet protocol service, and also is a leading provider of Internet and broadband services in South Korea. KT is growing its wireless broadband business in partnership with Sony (SNE), Intel (INTC) and Samsung (SSNLF). The company produced gross profits of $32 billion on $34 billion of assets last year, and KT stock trades well under book value right now.

Novy-Marx's research has opened up a whole new way to view value and quality when it comes to individual companies. More importantly, we can combine them to pick value stocks that should outperform the markets by a wide margin over the next year.

As accounting standards have become more uniform around the world, we can use this formula to find both domestic and global stocks with extraordinary potential.

As of this writing, Tim Melvin was long MT.