Investors from almost every part of the world exhibit a certain amount of home bias: the tendency to prefer domestic equities to international ones. This makes sense. Investors are likely more familiar with these brands and consequently are more comfortable putting their money toward them.
But in today’s investing world “adding international exposure is one of the first steps toward a diversified portfolio,” according to Morningstar portfolio strategist Amy Arnott. If, for example, the U.S. dollar weakens, exposure to European or Asian equities can soften the impact.
With that in mind, how can stock investors tackle international investing?
First, it’s important to remember that at Morningstar, we don’t view investing through the lens of daily price movements or hot tips. We see owning a single stock as similar to owning a small part of the company or the underlying business itself.
Consider the amount of effort we devote to researching and comparing options before buying a car. It tends to be a lot, and it tends to work out well for our needs, exceeding expectations and providing a reliable form of transportation. This is the same approach we take to buying a stock.
One of the best ways to identify high-quality companies is by checking out the Morningstar Economic Moat Rating, which assesses a company’s competitive advantage. The term “economic moat” was coined by Warren Buffett, who said, “The key to investing is ... determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
We used the moat rating as a starting point to compile a list of the best companies you can own. As the best companies in our coverage, they have wide economic moat ratings, the strength of their competitive advantages is either steady or increasing, they have predictable cash flows, and they allocate their capital effectively. (You can learn more about this methodology here.)
Here are the 31 companies based outside of the United States, but available to U.S. investors, that made the cut.
|Yum China Holdings Inc
|Anheuser-Busch InBev SA/NV
|British American Tobacco PLC
|Coca-Cola Femsa SAB de CV
|Imperial Brands PLC
|Reckitt Benckiser Group PLC
|Royal Bank of Canada
|The Toronto-Dominion Bank
|Roche Holding AG
|BAE Systems PLC
|Canadian National Railway Co
|Canadian Pacific Kansas City Ltd
|Rentokil Initial PLC
|Waste Connections Inc
|Dassault Systemes SE
|Taiwan Semiconductor Manufacturing Co Ltd
Consumer defensive and industrials are the most represented sectors on this list, with nine companies each. Healthcare is close behind with seven. The consumer cyclical, financial services, and technology sectors round out the list with two apiece.
This is a notable difference from the U.S.-based names on our list of best companies, where a majority of the firms reside in industrials, with consumer defensive in second place.
A note of caution: This list is not a call to action for you to buy all these companies immediately. Rather, it is a list of stocks you should keep an eye on and look for attractive entry points. Even the greatest company can be a bad investment if you overpay, and many firms on this list are currently overvalued.
That said, we note two of the stocks on the list that earned Morningstar Ratings of 5 stars as of Dec. 20, 2023, meaning they are undervalued according to Morningstar‘s fair value estimates.
They are Switzerland-based Roche Holding RHHBY, a global pharmaceutical and diagnostic company, and United Kingdom-based GSK PLC GSK, one of the largest vaccine manufacturers. Here’s what our analysts have to say about these two undervalued names from the list.
“We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic expertise.
“Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition. In addition, with the launch of Perjeta in 2012, Kadcyla in 2013, and Phesgo (a subcutaneous coformulation of Herception and Perjeta) in 2020, Roche has somewhat refreshed its breast cancer franchise. Gazyva, approved in CLL and NHL and in testing in lupus, as well as new bispecific antibodies Columvi and Lunsumio will also extend the longevity of the Rituxan blood cancer franchise. Roche’s immuno-oncology drug Tecentriq launched in 2016, and we see peak sales potential above $5 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales).
“Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens SIEGY, Abbott ABT, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.”
—Karen Andersen, sector strategist
“As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion.
“The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. We expect GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade.
“On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. We expect this focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much stronger pricing power with payers.
“From a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, we believe the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets.
“GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, we expect this unit will yield a stronger valuation than what is implied within the firm’s structure before the divestment.”
—Damien Conover, sector director
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.