Aswath Damodoran's Best Investment Ever
I was rereading today an interview Tom Gardner did with Aswath Damodoran back in 2005. In it, Tom asks the good Professor about his best investment ever. Here's what he responds:
My best ever investment was in Embraer, the Brazilian Aerospace Company that I bought after the election in 2000. For those people who don't follow Brazil, this is actually a lesson that can extend to emerging markets. Investors, in my view, tend to be indiscriminate when it comes to emerging market companies. When there is a crisis in an emerging market, they dump everything, good companies, bad companies, export, domestic.
The reason I picked Embraer is that Embraer gets 97% of its revenues in Western Europe and North America. They are about as Brazilian as Boeing is in terms of what they do. But in that year, because people were concerned about Brazil and Embraer got knocked down to six times earnings, five and a half times earnings, because it was viewed as a Brazilian company. I just thought it was completely unfair that a company like that should get knocked down, but from an investment standpoint...It was a wonderfully unfair opportunity for me. In fact, I think there are about six or seven stocks in my portfolio that are emerging market companies like Embraer that I bought after emerging market crises in those countries. So I have a list actually that I keep with me all the time. There is always a crisis in these emerging markets. It is not a question of whether, it is a question of when. You wait for the next crisis and you buy the unfairly hit stock. Embraer was perhaps my best ever.
The lesson, of course, is that when perception and reality differ (as they did when the market perceived Embraer as a Brazilian stock when in fact it was quite different), one has the opportunity to make serious money. And while Prof. Damodoran notes that this opportunity happens most often in volatile emerging markets, I am beginning to think we are seeing similar type opportunities in Europe today, i.e., European companies that aren't all that European. We ran a screen today looking for companies in Europe that derive less than 50% or so of their sales from the continent and that have seen their stocks drop significantly since the crisis in Greece came to a forefront. NBG is obviously one candidate given its operations in Turkey and then you have multinationals such as Nestle or L'Oreal.
Anyway, a subsegment of the market worth paying attention to. It worked for Aswath.