Deep value stocks are a double-digit return generator (and 6 stocks to prove it)

While much of the investing world's attention will be focused on artificial intelligence and finding the next great growth stock, Pzena Investment Management founder, chairman, and co-CIO Rich Pzena and long-time international equity portfolio manager Allison Fisch are not being dissuaded from their core of hunting for deeply undervalued stocks.  

"When you have a very concentrated marketplace that's all hyped up about future expectations that are going to translate into giant dollar revenue growth for a number of companies, you just have to be careful with those kinds of forecasts," Pzena said in an investor webinar recently.

In fact, you could say their opportunity set has become even more attractive - if that's possible.

"If you look at our strategies, over the last two years, we've had normal mid-teens returns. But the most amazing part about this, to me, is that at the end of two years of us having mid-teens returns, the opportunity set and the valuations that exist in the companies that we're buying today, are lower than when we bought two years," Pzena added.

Fisch, who leads some of Pzena Investment Management's emerging markets and international strategies, argues this revelation is even more apparent in equity markets outside of the US.

"If we weren't talking about AI right now, we could be talking about China, we could be talking about Europe, we could be talking about Brazil. There's plenty of differentiated controversy to take advantage of outside the US," she said.

With all this in mind, this wire will probe where they are finding the best opportunities in today's global equity market. We're going to do this by looking at six single-stock ideas as well as the macroeconomic and fundamental rationale for each name.

China isn't uninvestable - in fact, it may be about to become attractive

Stocks: Haier Smart Home (HK: 6690), China Overseas Land and Investment (COLI) (HK: 0688)

How many times have you heard it said that China is uninvestable? Well, while some investors subscribe to that theory completely, Pzena takes a different view. 

"When we start hearing that a geography is "uninvestable," that means it's probably getting pretty interesting," Fisch said.

The macro challenges facing the Chinese economy have been written about endlessly. In short, deflation caused by flailing consumer confidence and a downtrodden property market have caused the problems we now see in the world's second-largest economy. But just because the macro environment is challenging doesn't mean that individual companies can't shine.

One such business is home appliance manufacturer Haier. 

"It's one of the leading appliance manufacturers in China and it has a growing overseas business as well. This one has gotten cheap because of the fears around the property market, But interestingly, about two-thirds of sales from Haier are replacement, so it's not actually tied to housing turnover. It's been a great opportunity," she said.

Another is real estate conglomerate COLI:

"We really like [it] because it's both cheap and a high-quality way to be exposed to the sector. They've got a very strong balance sheet, where you would have to see much more significant pain before there would be any need to raise capital," Hisch noted.

A healthcare stock trading at 10x earnings

Stock: CVS (NYSE: CVS)

Healthcare has become a particularly interesting rotation destination for the Pzena team. The only problem is that the healthcare sector's defensive qualities tend to give its constituents a healthy premium. Luckily, for Rich, he found one such high-quality company trading at a rock-bottom valuation.

"CVS, which is in three businesses: retail pharmacies, health insurance, and PBMs [pharmacy benefit managers]," Pzena said.

"Retail pharmacy has been a dead business, because the PBMs have put pressure on the retail pharmacies to lower their margins ... Aetna was a big player in Medicare Advantage. And Medicare is a program that's really under pressure right now, and Aetna is actually losing money in that program," he added.

But before you think that this is a losing trade waiting to happen, Pzena is keen to point out the contrarian opportunity that may be hiding in plain sight:

"All of these businesses are out of favour. Yet, they're all flat or growing based on demographics, they're all at or below their normal level of margin structure, and it's hard to understand what a replacement for all of them would be. You can buy this business at 10 times current earnings, where those earnings are depressed. 

You are getting something for 10 times current earnings but [may get] five times [back] what this company should earn on a normal basis in a few years. That's about as cheap as you ever get a decent-quality franchise for," Pzena added.

Bottoms up! The Brazilian-Dutch brewery with an A+ management team

One region of the world where Fisch and her team are finding opportunities is Brazil. Brazil is the largest economy in Latin America and is the home of four of the region’s five largest companies. One such Brazilian name is the Brazilian-Dutch brewery firm, Ambev.

"[It's a] really well-run business. They've continued to move up in premiumisation, volumes are moving in the right direction, and the management team are A+," Fisch said.

"But sitting within Brazil, the macro has become even more challenging. But it tends to be challenging, so it's not as if they haven't been here before. [Businesses are] really struggling with inflation and weakening macro fears around disposable income, and a government that has become even harder to predict than normal. 

"What this has done, of course, is it has driven valuations down, and so as value investors, we're in there hunting around for opportunity," she added.

A European company whose fears of demise may be overblown

Stock: Teleperformance (EPA: TEP)

For any connoisseurs of business television news, you'll have heard many times about how the European economy is in a lot of trouble. If it's not a continent-wide recession, 2025 is likely to be a 0-0.5% year for growth. It's hardly inspiring for macro observers, much less stock pickers. But it's this exact disinterest, as well as the market-wide concerns over what jobs AI will take, that have Hisch and her team running headfirst into this French-domiciled stock pick.

"Teleperformance is an outsourced call centre business. And so you would say, well, AI is going to completely wipe this business out. But AI is not the first new technology that people thought would completely wipe this business out, and yet it has continued to grow," she noted.

"Why is that? It's because Teleperformance and its peers in the space are able to very effectively partner with large organisations and really add value in all elements of the customer experience. And if you think about it, it actually makes sense that companies like Teleperformance should be, and currently are, the ones in front in terms of investing first and taking advantage of AI-powered solutions on behalf of their customers. That's what we're seeing from them. As their business continues to grow, they are the ones who are exploiting these solutions rather than being cut out," she added.

The American bank making its comeback after two decades of problems

Stock: Citi (NYSE: C)

Finally, we couldn't do a value investing piece without highlighting the ultimate value play - the banks. While the Australian banking sector might be trading at lofty valuations, led in large part by record-breaking CBA, the valuation spread in global banks is a lot more nuanced. And in the case of one particular American bank, it hasn't enjoyed as much of the rally that its competitors have had simply because it's been dogged by special circumstances. But that may be about to change, says Rich Pzena. 

"Citibank has a unique franchise embedded in their business: their global cash management business is gigantic, it's high margin, and hard to replicate due to their decisions 40, 50, 60 years ago to acquire banking licenses in markets throughout the world, including many of the emerging markets that have become critical for multinational companies to bank in," Pzena argued. 

"Now, they've had all kinds of problems, and over the last 20 years, have made 27 acquisitions and did not integrate the systems. When they're asked by the Fed to provide data to help manage them, they've been way worse than their peers. They're operating under a consent decree that's requiring them to spend billions of dollars annually to become state-of-the-art. But now they're doing that. As this starts to improve, you'll see the turning point," he added.

To watch the full webinar, click here: