Use Funds To Tap Foreign Growth
Readers often ask why we don’t recommend more foreign stocks. The answer is twofold:
• First, our Quadrix® stock-rating system is driven by percentile ranks for dozens of statistics, and numbers for foreign companies are not always directly comparable. We have scores for about 440 companies with headquarters in foreign countries, but we are less confident in the usefulness of Quadrix scores for many of these companies.
• Second, individual foreign stocks tend to be risky, and not just because of volatility. Other common risk factors include political instability, currency troubles, and a lack of timely information that makes it hard for U.S. investors to act when things change.
For most U.S. investors who want foreign exposure, we recommend using mutual funds, like the four listed in the small table on page 2. At this time, we recommend only one foreign stock for purchase — British drugmaker AstraZeneca ($50; AZN), reviewed in Value Focus. We cover another five foreign stocks on our Monitored List, four of which are Canadian.
However, foreign equities do have a place in many portfolios. As the chart below shows, foreign stocks have substantially outperformed U.S. stocks in recent years. Since April 2003, the iShares MCSI Emerging Markets Index exchange-traded fund has gained 246%, while the iShares MCSI EAFE (Europe, Australasia, Far East) Index rose 80%. Both indexes left the S&P 1500 Index of large, midsize, and small U.S. companies and its 34% return in the dust. Such outperformance is difficult to ignore.
In addition, foreign stocks offer some diversification benefit to portfolios limited to U.S. equities, although the correlation between U.S. and foreign markets has increased in recent years. Emerging-market stocks have both higher risk and higher return potential than those from developed markets, and they also provide more diversification benefits.
While we are on the lookout for attractive foreign stocks, we will not recommend any stock unless we have confidence that Quadrix is painting an accurate picture. The foreign stocks we do recommend are selected on their individual merits, not because they are based outside the U.S.
Investors who prefer individual stocks might like the 15 presented in the table below. Keep in mind, however, that while the stocks have appeal, you buy them at your own risk. The Forecasts follows just two of these stocks, of which only AstraZeneca earns a Buy recommendation. For a look at Quadrix scores on all of the international stocks in our research universe, visit www.DowTheory.com/go/Foreign.