Why venerable value shop Tweedy, Browne has no qualms about buying tech – Citywire USA

Tweedy, Browne began life as a brokerage firm making markets in the small, illiquid stocks that Ben Graham favored and famously brokered the purchase of Warren Buffett’s first shares of an old Massachusetts textile mill called Berkshire Hathaway. 
Over time, Tweedy became a money manager, putting Graham’s value approach into practice. And while value investing has struggled mightily over the past decade, the $5.8bn Tweedy, Browne International Value (TBGVX) fund’s 5.39% 10-year annualized return through August 2022 has surpassed the 3.28% return of the MSCI ACWI ex-USA Value index.
In an interview with Citywire, the fund’s manager Bob Wyckoff, managing director Roger de Bree, and senior analyst Olivier Berlage discussed why they’re now buying (some) tech stocks and scooping up smaller European and Japanese names, their longtime position in Nestle, and why investors shouldn’t get too hung up on currency risk despite the dollar’s recent run.
Citywire: You own both domestic and foreign stocks. Although, as value investors, you proceed on a stock-by-stock basis, do you notice better valuations in one geographical area or another?
Tweedy, Browne: Since the financial crisis in 2008, US equities (as measured by the S&P 500), led by large and dominant technology companies, have produced more than double the compound return of non-US equities (as measured by the MSCI EAFE). As a result, valuations of US equities on the whole are today often many multiple points higher than their non-US counterparts. This, in our view, presents a significant opportunity for patient and longer term focused investors.
That said, the war in Ukraine and the continued disruption of supply lines it has wrought, particularly in the energy sector, has cast a pall over many, if not most non-US equity markets. In addition, the Chinese response to the rise in Covid cases leading to lengthy lockdowns has had a dilatory impact in the near term on economic growth in the Far East.
These exogenous macro events in Europe and China threaten near term economic growth, and profit margins. But we continue to believe that on a stock-by-stock basis, these concerns present a meaningful pricing opportunity in those regions for investors willing to look a bit further out for their returns. We have of late scooped up a number of new smaller and medium capitalization European and Japanese stocks priced at significant discounts to our estimates of their intrinsic values, and continue to maintain a diversified but limited position in Chinese equities.
CW: It seems like we’re a long way from using price-to-book as a Geiger counter for value. At the same time, you’ve adapted, even holding Alphabet since 2012. Has the price drop in technology and communications-related stocks this year encouraged you to look at them harder?
TB: We have no qualms about investing in higher growth technology companies as long as we believe their particular competitive advantage is sustainable, and we get a pricing opportunity in their shares (i.e., we purchase them at a discount from our estimate of intrinsic value). As Buffett has said, value and growth are joined at the hip. It’s simply a question of price. We got a pricing opportunity in Alphabet many years ago as the company stumbled briefly in adapting its technology to mobile devices, and have continued to maintain that position in many of our client portfolios as our estimate of the company’s intrinsic value rose right along with its stock price. It has been a phenomenal investment for us.
More recently, we have established modest positions in a few of the large Chinese internet platform companies, Baidu, Alibaba, and Tencent. They trade at large, and we believe, somewhat irrational, discounts to their US counterparts, and yet in our view have perhaps longer and more robust runways for future growth. In addition, we believe they have balance sheets to see them through what has been a very challenging period of governmental intervention that has constrained near term performance.
In addition, in the technology sector, we have also established positions in a couple of semi-conductor companies, Intel and Samsung. Their stock prices in the near term have borne the brunt of a slowdown in the high rate of growth in computer sales achieved during the ‘stay at home’ economy of 2020 and early 2021. These companies, in our view, remain well positioned for what should continue to be a very long runway of growth for all things tech, and trade at attractive valuations
CW: You’ve held Nestle for decades. What’s the thesis for the stock, and how much does the L’Oreal stake figure in the analysis? (Nestle owns around 20% of French cosmetics firm L’Oreal.)
TB: Nestlé is not a cheap stock at the moment. If you back out the L’Oreal stake at market value, it trades around 16x Ebitda based on the average of Wall Street analysts’ estimates for 2023. It is not being given away. However, it has been a very stable value-grower, and that has made it a very tax efficient investment. We calculate the growth in intrinsic value for Nestlé over the last ten years (2011-2021) has been in the 6%-7% range, and it is important to keep in mind that this number has been achieved in Swiss Francs, one of the strongest currencies out there. If they reported in euros or dollars, we believe this number would be a few percent higher over longer periods. We think this kind of value growth is quite remarkable for a company with approximately $95bn in annual sales. Often with stocks like these we will hold on to the shares as long as the valuation is not unreasonable in our view, and our estimates for the value compound remain in place. When the stock begins to get expensive, in our view, we trim it back or divest.
In our mind, Nestlé’s value growth has been driven by:
A good illustration of this may be what they are doing in coffee. Nestlé is the number one player in the world with an approximate 20% market share. The runner up is one-third their size and has a very fragmented, regional brand portfolio. Nestlé, on the other hand, is focused solely on the Nescafe, Nespresso and Starbucks (for the home market) brands, so there are economies of scale in their efforts.
CW: The dollar has had a very big run, and you’ve benefited in your currency-hedged strategies. How do you view the dollar’s run, and would you remove the hedges from strategies that have traditionally had them?
TB: After a great deal of study and analyzing long-term return patterns for hedged and unhedged investment strategies, we came to the conclusion long ago that we were not able to predict with any degree of consistency the future direction of the foreign currencies in which our investments were denominated. We also discovered that over long measurement periods, while the performance of hedged and unhedged strategies could vary significantly in the short run, in the long run, their respective return streams tended to come together. Furthermore, we found that at least from the perspective of a US-based investor, there was generally little upfront cost associated with hedging non-US currency exposure back into the dollar. All of these findings led to a decision early on in our international investment offerings to offer clients the opportunity to hedge their perceived foreign currency exposure back into the US dollar. When we began offering this hedging option way back in the summer of 1993, it was rather unique, in that most other international investment managers in the US did not hedge foreign currency exposure.
Today, our advice to investors remains that currency movements are unpredictable, and they should choose a hedged or unhedged strategy and stick with it over the long term. While they might experience a bit more volatility in the unhedged strategy, over the long term they will likely arrive at a similar return destination.
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