A £10,000 investment in Sir John Templeton’s fund in 1954 would have been worth around £2m by 1992. In my view, investors trying to follow the same strategy today should look at UK stocks.
Templeton’s success was built on two principles – a desire to find bargains where others were pessimistic and a willingness to hunt outside the US. In today’s market, I think that points towards the UK.
Contrarianism
Templeton once said people kept asking him where the outlook was good, but they ought to have been asking him where the outlook was most miserable. This is where the best opportunities are.
As I see it, the UK fits that description today. According to the International Monetary Fund, the UK is set to have the worst-performing economy of any of the G20 countries this year.
If that’s not pessimism, I don’t know what is. But this makes Britain the kind of place an investor following Templeton’s approach might have gone finding stocks to buy.
This is reflected in the valuations of UK stocks. Right now, the FTSE 100 is trading at a price-to-earnings (P/E) ratio of 11, which is cheap compared to the S&P 500 at 21.
Investor pessimism
So within UK stocks, where are investors the most pessimistic? I think the answer is clear – real estate.
Rising interest rates have been weighing on UK property prices recently. As mortgages have become more expensive, demand has fallen sharply.
As a result, real estate stocks have been falling sharply. House builder Persimmon and real estate investment trust Segro are among the worst-performing FTSE 100 stocks over the last 12 months.
I think this means there are some great investments in UK real estate stocks. Or, as Templeton would say, to buy when others are despondently selling.
A stock to buy
I’m not looking to buy either Persimmon or Segro, though. The stock catching my attention is a brick manufacturer.
Shares in Forterra currently trade at a P/E ratio of seven. And the stock currently comes with a 7.5% dividend yield.
The stock is highly cyclical, so tougher economic conditions may well cause profits – and dividends – to fall in the near term. But in my view, the long-term outlook is bright for this business.
UK brick manufacturing is an industry where demand generally outstips supply. And Forterra’s strong position in this market makes me believe it has a bright future.
Investment returns
The success of Templeton’s approach speaks for itself. A return of around 15% per year over nearly 40 years is way beyond what an investor could hope for from investing in an index.
I’m not saying I can achieve anything like that result. But it goes to show what is possible for an investor who is willing to unearth opportunities in areas others are unwilling to consider.
In addition, one of the features of Templeton’s investing style was his willingness to search beyond the US for stocks to buy. And right now, I think there’s an opportunity to find bargains in the UK.
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