Don't Fear Foreign Stocks

2/6/2012


Some investors approach international stocks with trepidation. Foreign stocks, especially those in emerging markets, conjure up images of volatility, political instability, and inflation.

However, investors should view international stocks as they would other asset classes such as bonds or real estate — just one of several components used to build a diversified portfolio.

Many foreign companies are traded on U.S. exchanges in the form of American Depositary Receipts (ADRs) or similar securities. These shares trade just like U.S. shares; they are denominated in U.S. dollars and represent an ownership interest.

Foreign stocks bring more to the party than just diversification benefits. The BNY Mellon ADR Index tracks all the ADRs traded on the New York Stock Exchange, NYSE Amex Equities, and the NASDAQ Stock Market. The BNY Mellon ADR Index has outperformed the S&P 500 Index in six of the last nine years. The S&P 500 has outpaced ADRs in the last two years, but the ADR index delivered a cumulative total return of 96% during the nine-year period, versus 72% for the S&P 500.

The Forecasts recommends several mutual funds that focus on foreign equities. Those funds and others, as well as a number of individual stocks, are listed in the table below. Our Growth Portfolio of mutual funds has a 20% weighting in foreign stocks, while our Conservative Portfolio has a 17% weighting. The Forecasts currently recommends just one foreign stock, the Long-Term Buy Rogers Communications ($38; RCI). Foreign stocks account for 15% (677) of the 4,418 U.S.-traded stocks in our Quadrix research universe. Of those 677 stocks, 170 have stock-market values of more than $10 billion and 44 are larger than $50 billion.

FOREIGN MARKET LEADERS
Below we list 21 foreign stocks with market capitalizations of at least $50 billion and Quadrix Overall scores above 50. All are the kind of market leaders investors might seek out to gain foreign exposure. We don't recommend any of these stocks as Buys, and many of them do not look impressive. We are, however, fairly confident in the Quadrix scores for these companies, as all have an OK to Rank of at least 70%. The Overall score is derived from dozens of statistics with different weightings, and OK to Rank reflects the percentage of those statistics for which we have data. Many foreign stocks have low OK to Ranks, and the lower the percentage, the less faith we put in the Overall score.
Company (Price; Ticker)
Stock-
Market
Value
($Bil.)
Div.
Yield
(%)
Trailing
P/E Ratio
Quadrix
Overall
Score
OK To
Rank
(%)
Country
Sector
America Movil
($23; AMX)
62.5
1.2
6
69
71
Mexico
Telecom
AstraZeneca
($48; AZN)
61.9
5.6
7
83
85
U.K. 
Health
BASF ($77; BASFY)
70.7
3.0
9
73
88
Germany
Materials
Bayer ($70; BAYRY)
58.0
2.3
16
73
82
Germany
Health
BG Group
($112; BRGYY)
76.3
1.0
19
71
76
U.K. 
Energy
BP ($46; BP)
145.1
3.7
7
75
84
U.K. 
Energy
Canon ($43; CAJ)
57.2
0.0
16
52
87
Japan
Tech
Ecopetrol ($51; EC)
105.0
3.7
15
96
76
Colombia
Energy
Gazprom
($12; OGZPY)
143.5
1.7
3
98
79
Russia
Energy
Nippon Telegraph
($25; NTT)
66.2
0.0
10
87
88
Japan
Telecom
Novartis
($54; NVS)
191.4
3.7
11
56
76
Switzerland
Health
Novo Nordisk
($119; NVO)
56.3
1.1
24
61
75
Denmark
Health
NTT DOCOMO
($18; DCM)
77.6
0.0
13
67
88
Japan
Telecom
Royal Dutch Shell
($71; RDSa)
228.5
4.0
7
98
74
Netherlands
Energy
SAP ($60; SAP)
74.2
1.7
20
70
87
Germany
Tech
Siemens ($94; SI)
86.2
3.1
10
59
77
Germany
Industrials
Statoil ($25; STO)
80.5
3.9
12
86
87
Norway
Energy
Suncor Energy
($35; SU)
54.3
1.2
13
95
78
Canada
Energy
Total ($53; TOT)
124.9
5.0
8
75
88
France
Energy
UBS AG ($14; UBS)
50.8
0.0
8
53
79
Switzerland
Financials
Vale ($25; VALE)
133.4
0.1
5
93
83
Brazil
Materials
Note: Quadrix scores are percentile ranks, with 100 the best.

 

FOREIGN STOCK FUNDS
-- Total Return --
Fund (Price; Ticker)
12
Months
(%)
3-Yrs.
(Ann.)
(%)
Expense
Ratio
(%)
Category
Recommended Funds
Manning & Napier International
($8; EXITX)
(10.0)
14.7
1.11
Large-cap value
Vanguard Emerging Mkts. Stock Indx.
($27; VEIEX)
(7.2)
27.2
0.35
Emerging mkts.
Vanguard Total Int'l Stock Index
($14; VGTSX)
(9.0)
16.5
0.26
Large-cap blend
Wasatch Int'l Growth ($19; WAIGX)
(0.1)
32.1
1.61
Small company
Exchange-Traded Funds
Vanguard FTSE All-World Small Cap
($86; VSS)
(11.7)
NA
0.33
Small company
Vanguard MSCI EAFE ($33; VEA)
(9.3)
14.2
0.12
Large-cap blend
Vanguard MSCI Emerging Markets
($43; VWO)
(6.8)
27.5
0.22
Emerging mkts.
Vanguard MSCI Pacific ($51; VPL)
(7.9)
13.6
0.14
Diversified Asia

Investors interested in foreign stocks should consider these three caveats:

Lack of Quadrix scores: For many U.S.-traded foreign stocks, we cannot generate Quadrix scores. Quadrix draws on dozens of statistics, and foreign firms may not report enough data. And for some foreign companies that do generate Quadrix scores, the system paints an incomplete picture due to poor data quality.

Late-breaking news: Even in the Internet age, U.S. investors may not hear crucial news about foreign stocks until it is too late to take action.

Big is beautiful: Given the inherent risks of investing in foreign stocks (exposure to foreign currencies, political troubles, news lag, etc.), we prefer to focus on the largest companies. They tend to generate more news and are easier to follow.

The table above presents only foreign stocks with market capitalizations of at least $50 billion. None are currently recommended by the Forecasts, but all have Quadrix scores backed up by solid data. Below we profile three of those foreign giants.

As Japan's largest telecommunications company, Nippon Telegraph & Telephone ($25; NTT) has about 30 million land-line subscribers and 58 million mobile customers. Formed by the Japanese government 1952, NTT now faces intense pricing pressure from smaller telecoms.

As a result, the company is trying to recast itself as an Internet and services company, rather than simply a telephone carrier, while seeking international growth opportunities. The conversion is already underway, with Nippon's voice-related revenue declining 36% in the four years ended March 2011 while Internet-related revenue nearly doubled. Cash provided by operations has risen in six of the last seven quarters. With an Overall score exceeding 80 at the end of each of the last 12 months, Nippon is rated A (above average).


Based in the Netherlands, Royal Dutch Shell ($71; RDSa) is an integrated energy giant that also ranks among the world's largest chemical companies. With ownership stakes in more than 40 refineries, the company plans to restructure its downstream business by shedding noncore assets — roughly 15% of its refining capacity. Meanwhile, projects in Russia and Qatar boosted capacity for liquefied natural gas last year.

Management has suggested that the plump 4.0% dividend yield could shrink, bringing Royal Dutch's yield in line with peers. In the near term, weakness in natural gas and refining could weigh on results. The company was slated to report December-quarter results Feb. 2. Royal Dutch earns an Overall score of 98, but it is not monitored by the Forecasts. We prefer Exxon Mobil ($84; XOM) and Chevron ($103; CVX).


In the water, the founders of SAP ($60; SAP) and Oracle ($28; ORCL) duel for the glory of owning the swiftest sailboat. In the realm of business software, their companies strive to design products that crunch data the fastest. In recent years, Oracle has gotten the better of its German rival by gaining market share in business-application software.

But SAP reported stronger sales growth in its latest quarter and is rolling out HANA, a product it boasts will let clients process business data in seconds rather than hours. Oracle claims that its Exadata machine beat HANA in a customer-run test; naturally, SAP disputes that assertion. For our money, we'll stick with Oracle, a Buy and a Long-Term Buy. SAP is rated A (above average).


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