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Looking Abroad for Investment Value

We've found some intriguing U.K. investment opportunities.

Mark Weber, 12/12/2006

Morningstar's 100 stock analysts cover 1,800 companies. Their full analyst reports are available through Morningstar Principia Stocks Advanced and Morningstar Advisor Workstation Office Edition.

Morningstar's "fat-pitch" investment philosophy--find great companies that boast competitive advantages and buy them at a discount to fair value--is simple to understand, but difficult to employ. The outstanding businesses we'd like to own rarely come cheap. Morningstar publishes fair value estimates and star ratings on over 1,800 companies. At present, a bit less than 5% of them trade cheaply enough for us to consider buying. The search for investment bargains, however, is a numbers game. The more rocks we overturn, the better our chances of finding something valuable the rest of the market is missing.

In an effort to turn over more rocks, we've been expanding our international coverage. Morningstar now has teams of equity analysts devoted to China, Canada, Australia, and the United Kingdom, digging for investment gold. By casting a wider net, we hope to unearth more compelling investment opportunities. Our increasingly global search for value puts us in good company--Warren Buffett's search for investment opportunities recently led to the purchase of Israel-based Iscar, Berkshire Hathaway's BRK.B first overseas acquisition.

As a member of the U.K. team, I've spent a lot of time recently watching the comings and goings of Europe's most dynamic market. The London stock markets, including the London Stock Exchange and its subsidiary Alternative Investment Market (AIM), are in the midst of a renaissance. Sarbanes-Oxley and other U.S.-market regulations have driven many capital-seeking companies away from the NYSE NYX and Nasdaq NDAQ and to the London exchanges. In 2005, London markets handled more than 600 IPOs, almost twice as many as the NYSE and NASDAQ combined. Of the 10 largest IPOs in 2006, only MasterCard MA went public on an American exchange.

The London markets have also outperformed their American counterparts. Over the past three years, the FTSE 100, an index of Britain's largest companies, beat the S&P 500 by roughly 400 basis points. More intriguingly, the London markets' solid performance has influenced public opinion. British newspapers recently reported the results of a TD Waterhouse survey revealing that only 9% of Britons expect the FTSE 100 to decline in 2007, while 45% of respondents expect the index to hit an all-time high next year. The same survey found that only 23% of Americans expect the market to perform well in 2007.

At Morningstar, we're big believers in Buffett's advice to be greedy when others are fearful, and fearful when others are greedy. Poll results like those detailed above indicate a lack of fear. Even so, Morningstar analysts have found a few bargains among the 30 U.K.-based companies we cover, though only Cadbury Schweppes CSG currently bears a 5-star Morningstar Rating for stocks. The picks highlighted below are also ADRs traded on U.S. exchanges, so they can be purchased by U.S. investors with minimum fuss.

Our Picks from Across the Pond
Cadbury Schweppes PLC
This food manufacturer has struggled to integrate its many acquisitions, but we think its brand portfolio and share of the confectionery market make it an attractive long-term investment. From our Analyst Report: "With 50 transactions since the mid-1980s and 21 transactions from 2000 to 2003, Cadbury Schweppes today reigns as the largest worldwide confectionery company, and the only firm that is a significant player in all three confectionery segments: chocolate, sugar, and gum. This strong platform garners the company a wide economic moat despite a less advantaged regional beverages business."PAGEBREAK

GlaxoSmithKline PLC GSK
Glaxo's diversified revenue stream and solid pipeline of new products make this firm one of our favorite large pharmaceutical companies. From the Analyst Report: "GlaxoSmithKline has amassed an impressive lineup of pharmaceutical offerings. While the firm has several blockbusters in its portfolio, its revenue comes from a wide variety of drugs, insulating it from the generic competition risks that most of its competitors face."

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