Many investors are scouring the markets for stocks that still offer sizable upside potential at this late stage of the bull market. With that in mind, the Wells Fargo International Equity Fund (WFEAX), which focuses on value stocks, has beaten more than 89% of its foreign large-cap peers and the benchmark MSCI ACWI Ex-USA Index for the past three and five years, returning an average annualized 10.2% in the five-year period through November 14, according to Morningstar Inc. Fund manager Dale Winner credits his success to avoiding both "value traps," beaten-down stocks whose problems will persist, and "value caps," cheap stocks with limited upside, Barron's reports.

Right now, Winner particularly likes three investment themes, according to Barron's detailed November 7 article. One is undervalued telecom cash cows, most notably Vodafone Group PLC (VOD).  The second is undervalued cyclicals that are cutting costs, including construction materials producer Compagnie de Saint-Gobain SA (SGO.France) and electrical equipment manufacturer Hitachi Ltd. (6501.Japan). The third is undervalued European financials with excess capital, such as banking and investment services provider DnB ASA (DNB.Norway) and insurance and investment management firm NN Group NV (NN.Netherlands). Additionally, among telecom services companies, he suggests Orange (ORA.France) and China Mobile Ltd. (CHL).

Performance Stats

The year-to-date price performance of these companies (in U.S. dollars for Vodafone and China Mobile, local currencies for the others) through Monday and forward P/E ratios based on consensus estimates of fiscal year 2018 EPS are, per Barron's: Vodaphone, +18%, 24; Hitachi, +38%, 12; DnB, +22%, 12; NN Group, +12%, 9; Saint-Gobain, +9%, 14; Orange, -2%, 11; China Mobile, -2%, 7. By comparison, the S&P 500 Index (SPX) was up 15% for the year-to-date through Monday, and its forward P/E ratio was 19, as of the latest weekly calculation performed on November 10 by Birinyi Associates, as reported by The Wall Street Journal.

Banks With Excess Capital

Norwegian bank DnB is solid financially, Winner tells Barron's, with one of highest Tier 1 capital ratios (16%) and one of the lowest leverage ratios (7%) in Europe. DnB pays a 4% dividend and Winner expects a 2% stock repurchase. He projects ROE headed to the mid teens, driven by cost reductions, reining in loan losses, and returns of capital to shareholders. The Norwegian economy and bank earnings are heavily influenced by oil prices, and Winner sees firm oil prices in the near future.

NN Group is another bank with excess capital, as Winner indicates to Barron's, and it pays a dividend of around 4.5%, he says. This bank is growing slowly, but Winner expects that its spending on stock buybacks to shed excess capital will be about equal to the dividend. With the European Central Bank (ECB) expected to reduce its balance sheet and thus raise interest rates, NN Group's profits should benefit, he adds. 

Cost Cutters

Building materials supplier Saint-Gobain should profit from a housing recovery in France and elsewhere in Western Europe, as well as its own cost-cutting program. In addition to reducing expenses, Hitachi also is aggressively divesting non-core businesses, including semiconductors. Winner expects Prime Minister Abe to be re-elected, continuing his expansionist policy dubbed Abenomics​.

Telecom Cash Cows

Vodafone currently yields more than 5%, and has increased its dividend for 27 straight years. The company is increasing its generation of free cash flow and is diversified internationally, with 30% exposure to fast-growing emerging markets, per Winner in Barron's. China Mobile, meanwhile, is the leading 4G wireless provider in China, adding more than 30 million new subscribers per quarter, he says. He sees a lull in capital spending during the next few years, freeing up cash for possible dividend increases. Its current yield is almost 4%. Orange, based in France but with operations in various European countries, offers a similar story, a cash cow whose dividend is supported by diminished capital expenditures and stabilizing competition.

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