Some of the most attractive stocks today are outside our borders. While the bull market in US stocks is about to celebrate its ninth birthday, bull markets in places ranging from Great Britain and Belgium to India, Hong Kong and Japan are younger and have more room for continued gains, according to global fund strategist Randy Pearce, CFA.
In recent years, foreign nations across the world have begun to shake off severe political, banking and economic challenges and, with the help of low interest rates and aggressive stimulus packages, have registered impressive economic growth. That renewed strength has helped propel corporate profit gains, especially for relatively small companies that provide hidden opportunities. Stock gains have followed. An index of small-company stocks in developed nations outside North America and an index of small-company stocks in emerging markets each soared more than 30% in 2017, outperforming broad US small-company indexes by several percentage points. But those stocks still offer greater bargains than US stocks, based in part on lower price-to-earnings ratios (P/Es) for the foreign stocks.
Bottom Line Personal asked Pearce how he selects the best foreign small- and mid-cap stocks…and asked him to share his favorites now. Some are traded on US exchanges as American depositary receipts (ADRs), and some on foreign exchanges.
Hidden Opportunities
There are about 4,000 stocks traded on major US stock exchanges, but across the rest of the world, there are more than 30,000 stocks. Many of them aren’t covered by Wall Street analysts and are little known by US investors. Because smaller stocks can be volatile, I look for strong companies with good balance sheets…solid growth trends…and sustainable competitive advantages.
I also seek companies that tap into powerful global trends because that will help them grow quickly for many years. These trends include the growth of middle-class populations in emerging-market nations…the increased use of technology in everyday personal and business life…and greater demand for health-care services as populations grow older.
My Favorites
Investing in one or more of these companies can help diversify a US-focused portfolio and has the potential to improve long-term returns…
B&M European Value Retail (London Stock Exchange: BME). Many brick-and-mortar retailers in Europe are losing market share to online competitors. But discount stores are somewhat insulated from this threat and are thriving. B&M operates 540 discount stores across the UK that sell a wide variety of merchandise, including packaged food, electronics and furniture, much of which are closeout or overstock items. The retail chain, which is expanding into Germany, attracts three million customers a week in the UK.
BGEO Group (London Stock Exchange: BGEO). This financial-services company is headquartered in London, but it conducts its corporate and consumer banking, insurance and brokerage operations almost entirely in the country of Georgia, which borders Turkey on the Black Sea. Overlooked by many Western investors, Georgia is a democratic republic and one of the most successful of the former Soviet satellite nations. It has free-trade agreements with European countries and China. And its economy is expected to grow by about 5% annually for the next few years, fueled by commodity exports. BGEO is the leading bank in Georgia, serving more than two million customers, and should greatly benefit from that growth.
China Medical System Holdings (Hong Kong Stock Exchange: 0867). As personal income rises in emerging-market nations, so does spending on health care. China’s pharmaceutical market is the second largest in the world after the US. This company has a unique and highly profitable business model. Instead of focusing on developing new drugs, it licenses the rights to best-selling Western drugs from pharmaceutical companies in the US and Europe that may not have the scale or know-how to operate in China. The company then employs an army of salespeople to market these drugs directly to doctors at more than 23,000 hospitals across China.
Melexis (Brussels Stock Exchange: MELE). Semiconductor makers around the world are profiting from the expanded use of chips in “smart” products. This Belgian company makes advanced electronics and semiconductors vital to the auto industry for safety applications (such as collision-detection systems) and energy-efficiency. The trend toward electric vehicles and self-driving cars will strengthen the need for Melexis products.
Nihon M&A Center (Tokyo Stock Exchange: 2127). Japan’s rapidly aging population, the oldest among any developed nation, has set off a mergers-and-acquisitions boom within its small-business sector—thousands of companies in Japan have founders or CEOs over the age of 65 with no succession plan in place. Nihon M&A is a boutique advisory firm that dominates this specialty niche, helping family-run firms negotiate the sales or mergers of their businesses.
Ritchie Bros. Auctioneers ADR (New York Stock Exchange: RBA). The world’s largest auction house for industrial heavy equipment is based in Vancouver, Canada, and operates in more than 15 countries ranging from the US and Australia to Singapore and the United Arab Emirates. It auctions off used trucks, bulldozers, tractors and excavators used in dozens of industries. The global resale market for heavy equipment is so fragmented that no other competitor approaches the scale or efficiency of Ritchie Bros.
WNS Holdings ADR (New York Stock Exchange: WNS). Investors tend to associate the fast-growing information technology (IT) industry with California’s Silicon Valley. But India has some of the world’s leading IT companies, which help big companies use technology to operate more efficiently and profitably. WNS established its reputation by providing business services such as payroll management and customer telephone support for airlines and auto insurers. The company now is expanding its expertise beyond simple outsourcing into the lucrative area of big data—analyzing huge databases of customer information to improve business performance.
Two Ways to Buy Foreign Stocks
Buying foreign stocks used to be challenging because, in most cases, you had to establish an account with a foreign broker. But now you can invest in thousands of foreign companies through US brokerages. Steps to take…
Search online for the name of the company you want to invest in and
“stock symbol” to determine the symbol and exchange and whether it trades as an American depositary receipt (ADR).
A few hundred foreign stocks trade on a US exchange as ADRs. These are issued by major US banks that buy bulk lots of stock shares from foreign companies and then reissue them as certificates that trade just like stocks on the New York Stock Exchange, Nasdaq or on the OTC (over-the-counter) electronic exchange. You can buy ADRs through most US brokerages with all trades in US dollars. It typically is easiest to invest in a foreign company’s ADRs rather than directly in its shares unless the ADRs have very low trading volume, say, just a few hundred shares a day.
If ADRs are not available, buy foreign stocks on overseas exchanges, typically in the country where the companies are domiciled. Online discount brokerages, such as Fidelity, Charles Schwab and Interactive Brokers, which have an especially large number of foreign stocks available, allow you to access dozens of major exchanges in places ranging from Australia, Hong Kong and Japan to Canada and Mexico, Belgium, Germany, Switzerland and the UK. Caveats: Trading on foreign exchanges generally is more expensive than on US exchanges. For example, buying or selling on the London Stock Exchange through Fidelity costs about $12 per trade…Hong Kong, $32 per trade…Tokyo, $27, compared with less than $10 on US exchanges. Also, since your money must be converted into a local currency before you purchase a stock, then back into US dollars after you sell it, the fluctuating value of the dollar against the local currency will affect your gains and losses.
