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Stock Strategist

Our Favorite Foreign Banks

These are the banks your watch list was looking for.

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Most foreign banks have enjoyed a phenomenal run in 2005, with banks in developing nations such as Brazil and Colombia leading the way. The six top-performing foreign banks in Morningstar's coverage universe averaged returns of 108.2% in 2005, the common theme being that they were all from emerging economies. Our six worst performers averaged a return of just 5.6%, and all of those were based in Europe.

While we do think that it is possible for business values to change a huge amount (e.g., a biotech company with a newly approved drug) in a year, we certainly don't believe the business values of banks are as volatile as their returns suggest. Certainly, we don't believe that intrinsic value can increase by 160%, as investors in  Banco Bradesco (BBD) seem to believe. Either the bank was terribly undervalued to begin with or investors are expecting Bradesco to deliver the moon. We're strongly inclined to believe the latter. Going forward, we think investors in developing-nation banks should temper their expectations and maybe consider taking profits from the most overvalued names.

Ganesh Rathnam does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.