In Your Portfolio, Why Limit Yourself to U.S. Companies?
Posted: March 22, 2016
Donald Trump wants to keep out some foreigners. But what’s your attitude toward foreign stocks in your portfolio?
The All-American approach may not be the best way to make your portfolio great.
If you can scour the entire world for bargains, you might find a few good opportunities not available if you limit yourself solely to U.S. companies.
Yes, American accounting standards are generally cleaner, or at least a bit less dirty. And yes, you can get information more easily on U.S. companies. But in my opinion, those aren’t sufficient reasons to limit your opportunity set.
In this column, I’ve recommended international stocks on 13 occasions, beginning in 1998. Last year I did badly, but generally I’ve done well.
Flops and successes
Four of my five selections from a year ago lost ground, with an average loss of 12.8 percent from March 24, 2015, through March 18. Over the same period, the Standard & Poor’s 500 Index was almost unchanged, up 0.1 percent.
The biggest loser was AU Optronics, a Taiwanese flat-screen maker, down 40.5 percent. The sole winner was Ace Ltd., an insurance company that merged with Chubb and gained 11.7 percent.
The long-term results are better. In 13 outings, my foreign picks have averaged a 16.4 percent gain in 12 months versus 8.7 percent for the S&P 500. My picks have been profitable nine times out of 13 and have beaten the S&P nine times.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Deutsche Bank
Looking for new international candidates, I’ll start with Deutsche Bank, Germany’s largest bank. It trades in the United States under the symbol DB.
Deutsche Bank lost money in 2015, harmed by tepid economies in Europe, the worldwide energy price collapse, and the depressed level of interest rates. Last year and 2008 were the bank’s only two loss years in the past 15 years. Analysts predict a swing back to profitability in 2016.
Because Europe has been struggling so badly and even Germany, its strongest economy, has problems, Deutsche Bank shares go for 0.35 times book value (corporate net worth), a bargain price.
XL Group
Ireland is home to XL Group plc, one of the world’s largest reinsurance companies. It trades in the United States under the symbol XL.
Hurricanes, earthquakes and tsunamis can cause big and sudden losses, and many investors hate uncertainty. Therefore, reinsurance companies usually trade for modest multiples. Those that are well managed and financially strong can withstand such losses, however.
I believe XL fits in that category. The company’s debt is only 19 percent of stockholders’ equity. The stock trades for about nine times per-share earnings.
Honda Motor
In Japan, Honda Motor Co. Ltd. (traded in the United States as an American Depositary Receipt, or ADR, with the symbol HMC) has been growing its sales at a 10 percent annual clip for the past five years.
Honda sells about 6 percent of the world’s cars, compared to more than 11 percent for Toyota and Volkswagen and about 8 percent for General Motors.
With Volkswagen suffering some loss in public esteem because of an emissions test-rigging scandal and GM in the doghouse for hiding problems with ignitions, I think Honda has an opportunity to pick up some share. Its stock goes for 11 times recent earnings and 10 times estimated earnings this year.
China Mobile
In China, I will repeat my pick from last year, China Mobile Ltd., a telecom carrier, even though it was down 12.5 percent. China’s stock market has done terribly of late, but I think ignoring the world’s second-biggest economy is not the course of wisdom.
The stock trades here as an ADR, with the symbol CHL. The company has posted revenue growth averaging close to 16 percent a year for the past decade, though admittedly it has cooled off recently. It has more cash than debt.
Korea Electric Power
Fifth and finally, I recommend a South Korean utility, Korea Electric Power Corp. The ADR trades under the symbol KEP.
Utilities are often staid, but Korea Electric has been growing its revenue at better than a 12 percent clip the past five years. It posted losses five years running in 2008-2012, but since then profitability has been strongly increasing. In the past 12 months it earned 21 percent on stockholders’ equity, a high return for any company, let alone a utility.
Disclosure: I own China Mobile for a couple of clients, and I hold Honda Motor and Korea Electric for one client.