High-Quality Foreign Stocks on Sale

You may have read about investors' propensity to invest close to home. The downside of doing so, however, is that we tend to miss opportunities to diversify our portfolios. Investing abroad can also be a valuable way to profit from currency trends or make up for rich valuations at home. According to data released monthly by the U.S. Treasury Department, U.S. investors made net purchases of more than $13 billion in foreign equities in August of this year alone. As part of Premium Stock Research Week, Oct. 24-30, we decided to look at what's on sale around the world.

We started out by using Morningstar's  Premium Stock Screener to focus on foreign stocks that we'd consider buying. The screen starts by looking for foreign stocks rated 5 stars. Five-star stocks are those trading at wide discounts to their fair value estimates, and our rating system makes high-quality companies more likely to reach 5 stars on a price dip. We rate a total of 279 foreign firms, and 16 of their stocks currently garner our 5-star rating. To narrow the field a bit, and focus on companies we'd rather own for the long run, we also decided to screen on firms with at least a "narrow" economic moat rating, leaving us with 10 foreign stocks to investigate further. To run this screen yourself,  click here.

Before getting to some of the companies our screen turned up, we would like to point out a few of the quirks and pitfalls of international stock investing. Foreign firms can either list their shares on a U.S. exchange or repackage some of their local shares as American depositary receipts (ADRs). Investors in ADRs don't really own the shares, but they have a claim that is almost identical. Furthermore, investors should bear in mind that changes in foreign-currency exchange rates relative to the U.S. dollar influence the price of foreign investments, which may increase their volatility.

Another important aspect of international investing is the value of digging below the surface of each company's story--something our analysts do every day. We note that while most of the firms on the list below are local players building their regional presence and with significant exposure to market activity in their corners of the world, a handful--including  Cadbury Schweppes (CSG),  Diageo (DEO), and  Mittal Steel (MT)--have grown into global players, competing toe to toe with multinationals all over the globe and with significant shares of their revenue and profit coming from the U.S. market. For better or worse, these latter firms offer less geographic diversification to U.S. investors.

Below are some of the highlights from the list of foreign stocks that passed our screen as of Oct. 24, 2005:

 Telesp Celular Participacoes 
Business Risk: Above Average
Moat: Narrow
Domicile: Brazil
From the  Analyst Report: "Telesp is the flagship of the Vivo brand, which has by far the best name recognition of the various wireless offerings in Brazil. With 19 million subscribers, it is close to overtaking Spain as Telefonica's (TEF) largest wireless division (all of Vivo already is bigger). Telesp's subsidiary Tele Centro Oeste Celular's  margins haven't been hurt as much, and we think this firm is a better-run company. But we think Telesp has more room for improvement, and its stock doesn't reflect this potential."

 Mittal Steel (MT)
Business Risk: Average
Moat: Narrow
Domicile: Netherlands
From the  Analyst Report: "Improved markets in North America and Europe are just part of the story, as Mittal's best assets are its operations in Asia, Africa, and Central and Eastern Europe. Formed mostly from privatized government ventures, these mills have averaged operating margins in excess of 30% for the past four years. Accounting for approximately 40% of total production on a pro forma basis, these mills have significant advantages in terms of labor costs, energy costs, and captive raw-material sources."

 Barclays (BCS)
Business Risk: Average
Moat: Narrow
Domicile: U.K.
From the  Analyst Report: "Despite Barclays' current struggles in the United Kingdom retail banking market, we like its collection of diverse businesses and strong market positions.... Barclays is the third-largest bank in the U.K. by assets. The firm has a collection of high-quality businesses: U.K. retail banking serves retail and business clients in the U.K., Barclays Capital is a debt-focused investment bank, Barclaycard is one of the largest European credit-card issuers, and Barclays Global Investors is an asset manager."

 Thomson 
Business Risk: Average
Moat: Narrow
Domicile: France
From the  Analyst Report: "Thomson has thoroughly changed the focus of its business portfolio.... The only survivor of this overhaul is a deep patent portfolio, which throws off a steady stream of licensing revenues, and a few network component lines. At the same time, Thomson has used acquisitions to build a comprehensive set of products and services catering to almost all forms of media, ranging from movie houses to video-game designers."

 Axcan Pharma 
Business Risk: Average
Moat: Narrow
Domicile: Canada
From the  Analyst Report: "Axcan has built a highly profitable specialty pharmaceutical franchise in the gastrointestinal market. Its pipeline of new product candidates remains promising, and we'd pick up shares at a moderate discount to our fair value estimate."

 France Telecom (FTE)
Business Risk: Average
Moat: Narrow
Domicile: France
From the  Analyst Report: "France Telecom is the incumbent telephone operator in France. FT still has 71% of the local market, 60% of the long-distance market, and 48% of the cellular market. The firm also has large wireless shares in the U.K., Poland, and other countries, with a total customer base of 64 million. Fixed and cellular clients generate 88% of the firm's sales. FT also owns Wanadoo, its Internet service, and Equant, which supplies international corporate telecom services."