Foreign markets filled with fear, and value

From China's slowdown to Argentina's inflation, a number of concerns are hovering over overseas stocks. That makes it a good time to strike.

By John Reese Aug 29, 2013 6:21PM

While it has by no means been producing gangbusters growth, the American economy has been outperforming its developed market peers in recent years and has been quite stable compared to those of many emerging markets.


Take that relative out-performance, throw in an enormous amount of quantitative easing from the Federal Reserve, and you get a U.S. stock market that has been one of the best places to invest since early 2009.

I still believe the U.S. market is a good place for long-term investors to be. But with the strong performance of American equities the last few years, and the hits and struggles that other parts of the world have endured, international stock valuations are looking pretty darned good these days.


Image: Earth encircled by money (© Bob Jacobson/Corbis)Sure, these markets come with some well known risks: China has its slowdown in growth and potential housing bubble; South America and the Middle East have ongoing political strife and Europe's economy is barely producing any growth, with the continent's debt woes still lingering.

 

But in many cases, it looks like investors are overreacting to these issues -- just as they did to the U.S.'s problems back in late 2008 and early 2009. Back then, many investors let fear drive them out of stocks and they missed out on a good portion, or in some cases all, of some tremendous gains. I think investors would be wise not to let the same kind of fears sway them from investing in cheap shares of good companies in international markets right now.


My Guru Strategies, each of which is based on the approach of a different investing great, are currently finding a number of fundamentally sound stocks abroad. Here are a handful that have caught their eye. As always, keep in mind that you should invest in stocks like these within the context of a broader, diversified portfolio.

 

Nippon Telegraph and Telephone Corporation (NTT): This Japanese telecom giant ($68 billion market cap) has raked in nearly $110 billion in sales over the past year. While Japanese stocks have surged under Prime Minister Shinzo Abe's QE-driven "Abenomics" policies, my James O'Shaughnessy-based value model thinks NTT has more room to run. It likes the firm's size, strong cash flow ($10.15 per share, more than six times the market mean), and 3.5% dividend yield.

 

Royal Dutch Shell PLC (RDS.A): This Netherlands-based energy power ($214 billion market cap) has taken in close to half a trillion dollars in sales over the past 12 months, despite the recession in its home continent of Europe.

 

Shell is a favorite of my O'Shaughnessy-based value model, thanks to its size, $13.45 in cash flow per share, and stellar 5.4% dividend yield. Shell also gets high marks from my Peter Lynch-based model. Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide Shell's 8.7 price/earnings ratio by the sum of its dividend yield and long-term growth rate (8%, using an average of the three-, four-, and five-year EPS growth rates), we get a PEG of 0.64, which easily comes in under this model's 1.0 upper limit.

 

Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt/equity ratios less than 80%. Shell's D/E is 18.6%, another good sign.

           

Accenture PLC (ACN): Ireland-based Accenture provides management consulting, technology and outsourcing services. It has done a good job of weathering the European recession in part thanks to its global reach, having upped earnings per share in each of the past three years.

 

Accenture ($51 billion market cap) is a favorite of my Warren Buffett-based model. It looks for firms with lengthy histories of earnings growth, manageable debt and high returns on equity (which is a sign of the "durable competitive advantage" Buffett is known to seek). Accenture delivers on all fronts. Its EPS have dipped in only one year of the past decade; it has no long-term debt; and its 10-year average ROE is an impressive 48%. Accenture also gets strong interest from my Lynch-based model. Its 15.1 P/E, 13.4% long-term growth rate, and 2.2% dividend make for a yield-adjusted PEG of 0.97, just making the grade. (If its price gets much higher than its current $72.45, however, it could exceed the Lynch-based model's 1.0 limit.)

 

Telecom Argentina S.A. (TEO): This Argentine firm ($2.9 billion market cap), which also offers cellular services in Paraguay, is majority-owned by Nortel Inversora SA (which in turn is majority-owned by Telecom Italia). Worries about political turmoil and inflation in Argentina have kept its shares down for the past few years. But recent elections for the country, speculation that much-maligned Telecom Italia may be selling a chunk of its stake, and a pretty solid second quarter for the company have pushed TEO's shares up more than 20% in the past month.

 

Four of my models think they're still too cheap. My Lynch-based approach likes the stock's 7.4 P/E and 23.6% long-term growth rate, which make for a 0.31 PEG ratio. My O'Shaughnessy-based growth model likes that it has upped EPS in each of the past five years, has a 0.64 price/sales ratio, and has a solid 83 relative strength. My Kenneth Fisher-inspired model also likes that price/sales ratio, as well as TEO's 13% three-year average net profit margins and 21.3% long-term inflation-adjusted growth rate. Finally, my David Dreman-based contrarian approach likes that TEO's P/E and price/cash flow ratios are both in the cheapest 20% of the market, and that it has a 28.9% return on equity and 4.9% dividend.

 

CNOOC Limited (CEO): Shares of this $90-billion-market-cap oil and natural gas operations giant (the Chinese National Offshore Oil Corporation) have lagged this year amid the China slowdown fears. But its fundamentals are strong. My Buffett-based model likes that its EPS have declined just twice in the past decade; that it has enough annual earnings ($10.8 billion) that it could pay off all of its debt ($13.7 billion) in less than two years, if need be; and that it has a 25.9% average ROE over the past decade. My Lynch-based model likes its 17% long-term growth rate, 8.3 P/E, and 3.7% dividend, which make for a yield-adjusted PEG of just 0.40.

 

I'm long TEO, NTT, CEO, ACN, and RDS.A.

 

John Reese is the founder and CEO of Validea Capital Management and Validea.com and the author of The Guru Investor: How to Beat the Market Using History's Best Investment Strategies.

 

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6Comments
Aug 29, 2013 8:52PM
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Another goofy article pumping stocks. Invest in your community because you live there.
Aug 29, 2013 8:56PM
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"Wal-Mart Stores Inc told investors on Thursday that it could provide up to $50 million in low-interest loans or other types of payments to Bangladesh factory owners for building improvements.

The money is part of the more than $100 million in loans and access to capital that a group of North American companies including Wal-Mart and Gap Inc pledged in July. The Bangladesh central bank would need to approve any foreign currency loan. Details about lending rates also need to be finalized."

 

A reminder that Wal-Mart just had a Coming of Christ meeting about "American Made" goods. So the winning "idea" was to have Bangladesh factories start producing goods with Made in America tags on them? Aren't we ready to push the crap management of EVERY business platform off our shores and into the oceans? American business platforms = LOSERS.  

Aug 30, 2013 1:53AM
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The Fed continues to pump foreign markets like a hard time inmate banging Paris Hilton in a porn film.
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