Value: No Translation Needed

Part of being a contrarian investor means taking the long view when others fixate on the here and now. Sometimes a prolonged slump in a sector or market can make a patient approach difficult to follow. We’ve found, however, focusing on the fundamentals goes a long way in reinforcing our discipline. That’s why the chart below has us excited. Based on normalized price-to-earnings ratios, the future looks bright for those investing internationally.

Normalized Earnings Highlight Opportunities Overseas

Heartland Advisors International Value Investing Overseas Earnings Chart

Source: The Leuthold Group, 1/31/1978 to 12/30/2016
USA is represented by the S&P 500 Index. Normalized earnings per share (EPS) are determined by Leuthold using a proprietary calculation of average 5-year price-to-earnings (P/E) for S&P 500 and MSCI EAFE Indexes.
Past performance does not guarantee future results.

Across various developed markets, companies are trading at 16x normalized earnings—a discount of 30% to the group’s historic average. The disparity is even more compelling when global equities are viewed against their domestic counterparts. By this measure, the discount is nearly 36%.

Some of the gap, we believe, reflects nagging uncertainty in Europe tied to Brexit fallout, and the effects of below average growth in China. However, valuing a business based on normalized earnings allows investors to make apple-to-apple comparisons across an economic cycle. We favor this approach because as long-term investors, we believe pursuing attractive valuations, whether they are found in the U.S. or abroad, is the cornerstone of generating alpha over the long-term.

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Heartland Advisors Value Investing Portfolio Manager Michael Jolin

Michael Jolin

Jolin, CFA, is Vice President and Portfolio Manager for the Heartland International Value Fund. He has 14 years of industry experience, 8 at Heartland.

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