Use Funds To Tap Foreign Growth

2/1/2010


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.

OUR FOREIGN FUNDS
Fund (Price; Ticker)
Foreign Fund
Category
1-Yr.
Total
Return *
Category
Rank *
Fund
Rating †
T. Rowe Price Int’l Discovery
($37; PRIDX)
Small
company
69.5
A
82
Vanguard Emerging Mkts.
Stock ($25; VEIEX)
Emerging
markets
83.7
B
93
Vanguard Int’l Value
($30; VTRIX)
Large-co.
value
44.9
B
98
Vanguard Total Int’l Stock
Index ($14; VGTSX)
Large-co.
blend
50.9
A
97
* Rankings and returns through Jan. 26, from Morningstar.   A = top 20%; B = next 20%; C = middle 20%; D = next 20%; E = bottom 20%.      † Ratings are percentile ranks relative to fund-category peers.

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.

INTRIGUING FOREIGN STOCKS
All 15 of the foreign companies below earn Quadrix Overall scores of 80 or higher with sufficient data quality to give us some confidence in said scores. However, high Quadrix scores alone are not reason enough to purchase a stock. Foreign stocks are not for everyone, as they may face a variety of risks not common for U.S. stocks. The Forecasts only covers two of these stocks, both of which earn an A rating and are listed in bold.
P/E
—– Ratio —–
———— Quadrix Scores * ————
Company (Price; Ticker)
Stock-
Market
Value
($Bil.)
Div. †
($)
Yield †
(%)
Trail.
5-Yr.
Avg.
Momen-
tum
Value
Quality
Overall
Industry
Country
AstraZeneca
($50; AZN)
72.8
2.09
4.2
8
13
75
92
96
98
Pharmaceuticals
United Kingdom
CGI Group ($14; GIB)
4.3
0.00
0.0
15
15
92
80
93
99
IT Services
Canada
Check Point Software
($33; CHKP)
7.0
0.00
0.0
17
17
90
48
94
94
Software
Israel
Comp. Bebidas
Americas ($97; ABV)
59.7
1.81
1.9
25
27
94
65
99
97
Beverages
Brazil
Core Laboratories
($120; CLB)
2.8
0.48
0.4
22
24
61
47
98
87
Energy Equipment 
Netherlands
Elbit Systems
($63; ESLT)
2.7
2.04
3.2
10
20
88
87
94
96
Aerospace & Def.
Israel
Enbridge ($44; ENB)
16.1
1.62
3.7
16
20
84
58
83
84
Oil, Gas & Fuels
Canada
Millicom Int’l Cellular
($75; MICC)
8.2
1.24
1.6
18
25
64
83
97
94
Wireless Telecom
Luxembourg
Novartis ($54; NVS)
124.3
1.45
2.7
16
17
85
71
86
94
Pharmaceuticals
Switzerland
PetroChina ($114; PTR)
208.0
3.57
3.1
13
12
52
83
78
88
Oil, Gas & Fuels
China
Research In Motion
($62; RIMM)
35.2
0.00
0.0
15
37
99
82
100
99
Commun. Equip.
Canada
Shaw Communications
($19; SJR)
8.2
0.86
4.6
18
28
86
69
95
89
Media
Canada
Smith & Nephew
($51; SNN)
9.0
0.68
1.3
16
23
85
68
82
93
Health Care Equip.
United Kingdom
Tim Hortons ($29; THI)
5.2
0.38
1.3
20
23
81
53
91
85
Leisure
Canada
Warner Chilcott
($27; WCRX)
6.8
0.00
0.0
16
NM
94
57
95
96
Pharmaceuticals
Ireland
† Some dividends and yields are estimated.     * Percentile ranks, with 100 the best.     NM Not Meaningful.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com