Five foreigners – These international stocks have an edge over U.S. rivals
LOS ANGELES (MarketWatch) — Just like that old Irving Berlin tune, what the savvy investor may find these days is that anything a U.S company can do, an international rival can do — sometimes better.
Investing in European stocks year-to-date would have certainly brought gains to many investors. The Dow Jones Industrial Average ($INDU) is down 2.2% so far this year, while the EuroStoxx 50 is up 12%, though those markets have been helped in part by a rally for the euro versus the U.S. dollar.
Conventional wisdom holds that U.S. investors should diversify by putting up to 15% and in some cases 20% of their portfolios in overseas markets. But some are still reluctant to embrace foreign stocks.
“There is a massive illogicality in ignoring stocks which are outside the U.S.,” said Dominic Freud, portfolio manager for Oppenheimer International Value (OIVAX) . “If you want to invest in stocks, you should try and find the stocks that offer the best risk/reward picture…whether the headquarters of that company is in New York, Houston, London, Paris or New York.”
And in several cases, the better investments have been abroad, said Freud, noting that Citigroup, Inc. (C) and J.P. Morgan Chase Co. (JPM) shares are both down more than 8% this year, while Anglo-Irish Bank Corp. (UK:ANGL) is up 20%.
“If you’d invested in Motorola (MOT) over a decade ago, you would have made roughly zero,” he said. “Over that same period, you could have bought Nokia (NOK) , at the time the No. 3 player and the only pure play, and you would have had the opportunity to make 50 times your money.”
While there are some very good U.S. companies out there, the fact remains that there are a growing number of international companies beating them at their own game.
Here are five stocks that fund managers and analysts say have an edge over their U.S. counterparts.
Toyota vs. General Motors
General Motors Corp. (GM) has definitely seen its share of bumps in the road, recently reporting a steep second-quarter loss despite deep discounts to boost slumping sales. See full story.
Japan’s Toyota Motor Corp. (TM) , meanwhile, posted a record month in July for U.S. sales.
Jim Moffett, manager of the UMB Scout Worldwide fund (UMBWX) , said Toyota has none of the problems GM faces regarding health-care costs and pensions that are a “substantial liability and drag on the company.”
Toyota, he notes, has become a worldwide producer, with a 40% market share in Southeast Asia, and is better at producing a broad line of cars that people want to buy. “GM has made a big bet on the big SUVs and light trucks and pickups. With higher energy prices, that’s a real drag for them whereas Toyota’s less exposed to that, making more fuel-efficient cars like the Prius.”
Moffett added that Toyota’s relatively attractive earnings “keep clicking along, whereas GM’s looks like a rollercoaster.”
Smith & Nephew vs. Striker, Zimmer
Gary Anderson, assistant portfolio manager for the UMB Scout Worldwide Fund, likes U.K.-based Smith & Nephew PLC (SNN) as one of the top global players in the orthopedic field. The company specializes in hip and knee replacements. It’s also No. 2 or No. 3 in treating serious fractures and repairing broken and shattered bones, he said.
Smith & Nephew competes with U.S.-based Zimmer Holdings Inc. (ZMH) and Stryker Corp. (SYK) .
Anderson said both Zimmer and Stryker are world-class companies, and they’d particularly like to own Zimmer if it were an offshore company given that it’s so dominant in the hip and knee industry. But Smith & Nephew, he notes, is the fastest growing in that sector and has been gaining market share for the last three to five years.
“They’ve got good products and keep coming out with new technology,” he said.
The aging baby boomer population spells out strong demand for several players in the field, he said. “The overall thing we like about the whole orthopedic area is the replacement-parts market with the aging population as people are getting older in the U.S. and Japan and not going gracefully.”
Ssab vs. Nucor
Steel has been a volatile industry in the last year, with analysts somewhat divided on price direction. Whereas Standard & Poor’s, in its semiannual metals survey, projected lower overall spot prices this year versus last year, Morgan Stanley recently said excess steel inventory has been curbed, projecting prices will start to rise again near the end of this year.
Ray Mills, who manages T. Rowe Price International Growth & Income (TRIGX) , likes Swedish specialist steel group Ssab Svenskt Stal AB (SSAAF) , which makes high-strength steel sheet and steel plate. Its U.S. competitor is Nucor Corp. (NUE) , which Morgan Stanley recently upgraded to overweight as part of its overall steel sector upgrade.
Mills said the advantage to owning Ssab over Nucor is tight. Ssab’s price-to-earnings forward ratio is 4.9, with a dividend yield of 3.8%, while Nucor has a P/E ratio of 7.4 and a dividend yield of 1.1%.
“Both are good companies, but Ssab is valued a little better. Both are well placed in the market and have some growth ahead of them. Both are selling inexpensively, but one is cheaper than the other,” he said.
In a research note on July 19, Handelsbanken Capital Markets reiterated an accumulate rating on Ssab, saying that while they expect steel prices to decline, Ssab’s yield and multiple valuation are still attractive.
Roche vs. Pfizer
A stronger euro has certainly helped shares of Swiss drug maker Roche Holding (RHHDY) , which are up 22.5% versus a 2.5% fall for shares of Pfizer Inc. (PFE) year-to-date. Roche co-markets cancer drugs Avastin and Herceptin with Genentech, markets a version of Tamiflu for influenza and is one of the world’s leading suppliers of flu shots.
The World Health Organization reportedly said Tuesday that it’s in talks with Roche over stockpiling Tamiflu.
Pfizer, meanwhile, has been plagued by safety concerns over its key Celebrex arthritis treatment.
“Roche has done nicely in terms of its pipeline and getting approvals,” Oppenheimer’s Freud said. “Just the fundamental performance of Roche this year, in terms of growth and income and growing in earnings expectations, has been much stronger than we’ve seen from U.S. drug companies like Pfizer.”
He said earnings expectations for Pfizer have gone down this year by about 10%, while expectations for Roche are flat.
“If you’re looking for stronger-than-average growth in the sector, it’s difficult to argue Pfizer will have the same growth as Roche,” he said, though he added that Pfizer’s valuation is reasonable so he has “no great problem with the company.”
“But looking for growth, Roche is the better counter,” Freud said.
Hermes vs. Coach
As Vladimir Milev, financial investment analyst with Metzler/Payden, puts it, the economy has to get really bad before the luxury-goods sector takes a hit. And what Europe offers over the U.S. is more choice of companies, such as French-based Hermes International (FR:005229) , LVMH Moet Hennessey (FR:012101) and Gucci Group owner Pinault-Printemps-Redoute (FR:012148) .
“The ‘luxury goods’ sector is much better represented in Europe: there are many choices…some of which trade at discounts to their U.S. counterparts yet have very strong franchise values here, in Europe and Asia,” said Milev.
In the U.S., luxury-goods plays are limited to companies such as leather-bag maker Coach Inc. (COH) and jewelry and silverware group Tiffany & Co. (TIF) .
Hermes, said Milev, has seen fairly strong franchise value and “pretty good control over quality they produce so they’re an interesting choice when it comes to luxury goods.” It has also been tapping into Japan and Asia, and newly affluent Chinese shoppers who go to Europe specifically to buy those luxury goods, he said.
Hermes did disappoint with its first-half sales growth of 8%, owing to a slowdown in growth of bags and luggage in Japan. Coach, meanwhile, saw its fourth-quarter net income jump 49%, and it lifted its 2006 outlook on earnings.
By Barbara Kollmeyer
Barbara Kollmeyer is a reporter for MarketWatch in Los Angeles.
Source: MarketWatch
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