5 Stocks Top International Managers Have Been Buying
These medalist managers from Artisan, Dodge & Cox, and Vontobel picked up Internet giants, depressed energy stocks, and a European telecom last quarter.
It sure is good to be an international investor these days. As of this writing, the MSCI EAFE Index (a broad measure of foreign-stock performance) has outperformed the S&P 500 17% to 10% for the year to date. As a group, emerging markets are doing even better. Investors have taken notice: Flows into foreign-stock funds surged during the first half of 2017.
Many would argue that the party has just gotten started. Despite this year's runup, the MSCI EAFE Index still lags the S&P 500 by a substantial margin for the trailing 3- and 5-year periods, suggesting that foreign stocks may have more room to run.
Given these prospects, we looked to a few of our favorite foreign-stock funds managers for international ideas. All of these stocks are trading in 3-star range today, suggesting that they're fairly valued by Morningstar's metrics. Yet they're worthy additions to your watchlist.
Led by Mark Yockey, the team at Silver-rated Artisan International (ARTIX) takes an eclectic approach to investing abroad, blending fast growers with more stable ones, and peppering in turnaround plays. During the second quarter, purchases included Deutsche Telekom (DTEGY) and Tencent (TCEHY).
The team expects Deutsche Telekom to benefit from trends in mobility, connectivity, and cloud computing.
"Our belief is economic recovery in Europe and the company's renewed focus on core businesses while shedding noncore assets, should contribute to better growth and profitability," they noted in their recent quarterly commentary. "We are also attracted to DT's high levels of recurring free cash flow. Though not central to our investment thesis, its faster growth U.S. wireless business is a strong candidate for a strategic merger."
Morningstar senior equity analyst Allan Nichols thinks the no-moat company is making some smart strategic changes, including selling its stake in EE, merging with MetroPCS in the U.S., and addressing challenges in its home market. He's also pleased to see revenue growth in Germany and other parts of Europe for the first time in a couple of years.
"Two of the items we've discussed a lot as growth keys in Europe, the buildout of fibre and selling converged services of fixed-line and wireless telephony, are starting to kick in," wrote Nichols in his latest analyst report.
Tencent provides Internet, mobile, and telecommunication services in China, including games and a messaging service.
"We think Tencent is one of the best-positioned Chinese Internet companies in terms of mobile monetization," note Artisan's managers.
Morningstar senior analyst Marie Sun agrees.
"Tencent delivered another strong result in the second quarter, which reinforced our view of the company as one of the long-term winners in the China Internet space with a wide moat," she says in her latest analyst report.
The company's mobile app Weixin/Wechat has more than 963 million monthly active users in China while its instant-messaging software QQ boasts 850 million monthly active users.
"We believe the vast and sticky user base has formed a strong network effect, which provides the basis for Tencent's wide economic moat," Sun says.
Like the team at Artisan International, the managers at Bronze-rated Virtus Vontobel Emerging Markets Opportunities (HEMZX) padded their stake in Tencent during the quarter. Favoring dominant, steady growers, the Vontobel crew also added to their position in Alibaba (BABA).
The managers noted in their second quarter commentary that Alibaba upped its revenue guidance to at least 45% for the coming fiscal year, driven largely by its commanding e-commerce business.
"Apart from e-commerce, we also believe that there are other key longer-term drivers that are not adequately captured in the company's earnings, such as Alibaba's 37% interest in ANT Financial, China's leading payments business," say the managers. "It also has a leadership position in the cloud, similar to that of Amazon (AMZN) in the U.S.; although cloud penetration in China is 8 to 10 years behind the U.S."
Alibaba earns a wide moat from Morningstar, thanks in part to its interconnected online marketplaces and the value of its platform to its enormous user base. And it has a long growth runway ahead of it, according to Morningstar sector strategist R.J. Hottovy.
"Over the past few years, Alibaba has transitioned from being just a traditional e-commerce marketplace to a big data-centric conglomerate, with transaction data from its marketplaces, financial services, and logistics businesses allowing the company to move into cloud computing, logistics, and media and entertainment," says Hottovy in his latest report. "We've long thought that a strong network effect can allow e-commerce players to extend into other growth avenues, and nowhere is that more evident than Alibaba."
Lastly, the team at Gold-rated Dodge & Cox International Stock (DODFX), which takes a patient approach to investing in out-of-favor names, added to existing positions during the quarter, including integrated oil companies Statoil (STO) and Suncor Energy (SU). Norwegian company Statoil is investing counter cyclically in economically attractive new projects, say the managers, while Canada’s Suncor Energy's best-in-class management oversees a large and low-cost resource basin in the Canadian oil sands.
"We believe both of these companies are trading at a sizable discount to the value of their resources if oil prices recover," write the managers in the fund's semi-annual report. "While the short-term direction of oil prices is difficult to forecast, we believe the long-term fundamentals of supply and demand point to higher prices."
Morningstar sector strategist Allen Good notes that no-moat Statoil posted an increase in adjusted second-quarter earnings and positive free cash flow generation.
"We anticipate positive free cash flow generation as Statoil starts replacing more and more costly barrels with lower break-even projects, lowering the current break-even level of $50/bbl," he says. "Also, we think the lowering of exploration expenditure guidance from $1.5 billion to 1.3. billion for 2017 is a further positive, not only reflecting achieved efficiency gains, but also showing a commitment to strict project selection to achieve cash flow targets."
During the second quarter, Suncor Energy's management team began to make good on its promise to return capital to shareholders, notes Morningstar analyst Joe Gemino in his latest report. The no-moat firm bought back shares and increased its dividend.
"Suncor's capital resources, coupled with its operating cash flow, allow the company to weather the near-term storm and focus on current growth projects without compromising the balance sheet," writes Gemino. "The company's future oil sands projects could drive significant growth in a better oil-price environment." Before growth can happen, though, Suncor needs to implement improved solvent technology.
Susan Dziubinski has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.