This column regularly culls investment ideas from Morningstar's proprietary indexes. We've shared undervalued picks from our U.S. stock-focused wide-moat index, dividend growth index, and even our exponential technologies index. The indexes have proven to be fertile ground, providing investors with names to investigate further.
Today, we're going global: We've sifted through the Morningstar Global ex-US Moat Focus Index in search of undervalued foreign stocks.
The Global ex-US Moat Focus is a subset of the Morningstar Global Markets ex-US Index, which is a broad index representing 97% of developed (ex-US) and emerging-markets market capitalization. We rank the wide- and narrow-moat stocks in the broad index by lowest price/fair value to find the 50 cheapest wide- and narrow-moat stocks. These 50 stocks represent the most compelling values among the global moat universe, according to Morningstar analysts.
The Global ex-US Moat Focus Index invests in securities in their local currencies, on their local exchanges. For purposes of this article, we focused on companies from the index that also have shares listed on U.S. exchanges. As such, these stocks are readily available to U.S. investors.
Here are the 10 companies from the index whose U.S.-traded shares are at the deepest discounts to our fair value estimates as of this writing.
Here's a closer look at three stocks from the list.
U.K.-based Vodafone is one of the largest wireless phone companies in the world--and it's successfully transitioning to a diversified operator offering converged mobile and fixed-line services in many markets, argues senior analyst Allan Nichols. In fact, Vodafone recently closed its merger with Idea Cellular in India, creating the largest wireless operator there; the combined network covers 92% of the country's population.
"We are excited for the closing of the merger," notes Nichols. "Besides the increased scale and coverage of the combined company it provides lots of opportunities for cost savings as duplication in some regions and staff in some areas are reduced, and nationwide marketing becomes more efficient as almost all regions are now reachable by the combined network."
Morningstar assigns Vodafone a narrow economic moat, thanks to its cost advantages and efficient scale.
Global wealth manager and investment bank Credit Suisse is based in Switzerland, where it's one of the two dominant retail and commercial banks.
"We have consistently made a case for Credit Suisse as the 'poor man's UBS,'" explains analyst Johann Scholtz. "We believe it offers many of the same qualities as UBS at a discounted value. For the second quarter running, Credit Suisse delivered a stronger set of results than UBS."
Credit Suisse generates most of its earnings in stable and low-risk private banking/wealth management and Swiss commercial banking. Profitability of its core business comfortably exceeds its cost of capital, adds Scholtz. And its wealth management business earns a narrow moat, with intangible assets and switching costs as the primary moat sources.
Germany's BMW group is one of the world's leading light-vehicle manufacturers, and it also produces BMW motorcycles and provides financial services. Morningstar assigns a narrow moat rating to BMW, thanks to the firm's globally recognized brands, leadership in powertrain technology, and premium pricing, explains senior analyst Richard Hilgert. BMW continues to outperform the overall car market in the face of global economic uncertainties.
Yet despite the company's solid performance, its shares trade about 30% below what we think they're worth.
"We think BMW's stock has been overly discounted on concerns regarding an escalation in tariffs, the diesel antitrust investigation, the U.S. demand cycle, and a shift to lower-priced, locally produced vehicles in the Chinese market," explains Hilgert. He calls the stock "compelling" at current levels.
Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.
Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.