European cyclicals have grabbed the attention of many investors who are bullish on European recovery following the economic crisis and Dale Winner, co-manager of the Wells Fargo Advantage International Equity Fund, counts himself among them.
Risk has greatly reduced in Europe, Winner said, and GDP is on the upswing even as corporate capital expenditures in the Eurozone are still at a 20-year low.
As such, “we want to be involved in European cyclicals, but we’re not sure how the cycle will go and when it will really take off, which is why we’re focused on what we call ‘self-help cyclicals,’” said Winner, who is also co-portfolio manager for the EverKey Global Equity team at Wells Capital Management.
Self-help cyclicals are companies that in the wake of the financial crisis took it upon themselves to “get their houses in order,” Winner said, in order to become stronger and more competitive players in a global market. They are now poised to take better advantage of the recovery when it really gets going.
German engineering and electronics behemoth Siemens is one of the best examples of this, he said.
“We compare Siemens to GE in the U.S., even if its margins are much lower, because it was such a huge conglomerate with a bloated cost structure,” Winner said. “But a new CEO has totally reshaped its portfolio, by, among others, exiting low return businesses and by selling Siemens’ telecom network, NSN, and then returning cash to shareholders. Siemens also has a three-year plan to increase margins from nine percentage points to 12 percentage points, which is a great way to fine tune a bloated cost structure.”
Winner has owned Siemens for two years now, and although it is trading at a 20% discount to its competitors, the aggressive measures taken by the CEO mean that “its margins will get closer to its competitors and we’ll have 65% to 75% upside returns from here on,” he said.