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Up On Down Markets



Bad news has been a good friend to Charles H. Brandes. It was the bear market of 1973 and '74 that prodded Brandes to quit his job as a stockbroker and open his own global money-management firm. Now, 21 years later, Brandes Investment Partners manages a tidy $4 billion from its home base near the crashing Pacific surf in Del Mar, Calif. But its 51-year-old founder, a dedicated value investor with an eye for cheap stocks, is still a bad news bull.

Currently, Brandes and his dozen young analysts are sifting through the rubble of emerging markets from Latin America to Asia looking for nuggets others have discarded in their scramble to avoid the aftershocks of Mexico's peso collapse. Says Brandes: "The markets are very inefficient and manic-depressive. And wrong a lot."

Betting that the markets are wrong has paid off for Brandes and his investors, a well-heeled lot who must ante up at least $100,000 to get in the money manager's door. Over the past 10 years, Brandes' international equity portfolio has returned a tidy annual return of 23%--nearly five percentage points better than the widely watched Morgan Stanley index of European and Asian stocks.

SKUNKED. Amid such high returns, Brandes' assets have mushroomed 1,500% in just six years. Last year, however, proved that even home-run kings sometimes strike out. Rising interest rates and political turmoil hit such Brandes favorites as Hong Kong, Spain, and Italy, leaving investors nursing a 3% loss for 1994 after a 41% gain in '93. But Brandes says one year's losses shouldn't make or break an investment strategy. He prefers to hold stocks for at least three to five years and cautions against buying whatever is faddish. "What's a good stock for 1995?" he asks. "That's not the right question."

Nevertheless, several gems have popped up on the firm's screen for long-term value (table). Brandes' right-hand man, Glenn R. Carlson, is prospecting in Argentina, where stocks have been brutalized by fears of currency devaluation. Carlson's top pick: YPF, a big oil producer that trades at only 3.7 times cash flow. Brandes is less sanguine about Mexico. Still, he continues to like Telefonos de Mexico, the peso-shocked phone giant, whose American depositary receipts have plunged since 1994. That has left Telmex' price-to-cash flow ratio at a mere 5, well below the 5.7 average for the slower-growing Baby Bells. Brandes also is eyeing several value plays among smaller U.S. regional thrifts. His top pick: IBS Financial, based in Cherry Hill, N.J. It has lots of cash left over from an IPO and could be a takeover candidate in the current wave of industry consolidation.

Although he's a long-term investor, Brandes is not afraid to sell out--even if it's unfashionable to do so. In 1990, Brandes bought Compania de Telefonos de Chile, then a newly privatized utility, for $12 to $15 a share. The stock, he recalls, "was being ignored in spite of the fact that Chile was one of the most successful economies." Less than a year later, with Latin stocks sizzling, Brandes sold CTC for $37. He now makes a similar case for another out-of-favor stock: France's Alcatel Alsthom. A giant power-plant builder, cable manufacturer, and the maker of the French TGV bullet train, Alcatel has seen its stock decimated by managerial and financial embarrassments. Now trading at $18, its ADRs were $29 only a year ago. But Brandes notes the company still has a strong balance sheet and rich free-cash flow. And it's trading at a third of the cash-flow multiples that global competitors are fetching.

SMALL-CAP PLAY. To identify the Alcatels of the world, Brandes looks for low ratios of price to cash flow, book value, and earnings, among other things. His analysts examine corporate accounting standards and business prospects, then hit the road to visit companies. But even if all screens flash "buy," Brandes strictly limits how much money can go into any one company, industry, or country. The firm never has more than 20% in emerging-market stocks, and it limits the number of equities in each portfolio to 30 or 40. "We want our stock ideas to have an impact," says Carlson.

Despite last year's weak results, Brandes recently began offering a portfolio of small-capitalization overseas stocks. Next month, he'll launch his first mutual fund, which will invest only in non-U.S. stocks. Around the world, Brandes says, "equities are where the wealth is produced." And from a value standpoint, the more bad news the better.By Nanette Byrnes in Del Mar, Calif.

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