Dorfman: Exploring world of foreign stocks can turn up gems
Mark Twain once wrote that the oyster thinks it is the pinnacle of evolution — but that only an oyster would be egotistical enough to think that.
Similarly, there is a bit of arrogance in thinking that all worthwhile investment opportunities are within the United States. Adding stocks from other countries can sometimes enhance returns — and may reduce risk.
Dozens of foreign companies are traded in the United States. Some of them trade as American Depositary Receipts; others are directly listed on stock exchanges.
I am recommending stocks from five countries.
China Mobile
I will begin with one from China, in whose stocks I have had major flops and victories. Many Americans won't touch Chinese stocks because they don't trust Chinese companies' accounting.
There have been several accounting frauds in recent years involving Chinese companies (and I got caught in one in 2011). Yet I believe it is unwise to ignore the world's second biggest economy, which boasts a higher growth rate, younger population and smaller government deficit than the United States.
China Mobile Ltd. (trades as an ADR under the symbol CHL) seems to me a good choice. China's huge size and rapid advancement mean that it needs an extensive and modern communications network. China Mobile serves the entire country, including Hong Kong.
In the past five years, China Mobile's revenue has grown at an 11 percent clip, earning at about 5 percent. The stock sells for 15 times earnings, cheaper by that measure than AT&T, whose revenue growth has been 1.4 percent a year.
AU Optronics
As a turnaround story, I favor AU Optronics (whose American depositary shares trade under the symbol AUO). The Taiwanese company makes LCD screens for televisions and mobile phones.
AUO's earnings have been spotty, with losses in three of the past five years. It was profitable last year, however, and analysts foresee rising earnings this year and next. The shares are modestly priced at nine times earnings and 0.4 times revenue.
Royal Dutch
In Europe, one stock I like is Royal Dutch Shell Plc, the giant British-Dutch oil company. The ADRs are traded under the symbols RDS.A and RDS.B.
Big, integrated oil companies usually have done well in the aftermath of major troughs in oil prices. Some of their weaker competitors dry up and blow away; others become fodder for acquisitions at a favorable price.
The price of oil has fallen from about $108 a barrel in June to about $47. I don't know whether we have reached the bottom, but if not, I believe we are close.
Royal Dutch shares look attractive at 13 times earnings, 0.5 times revenue and 1.1 times book value (corporate net worth per share).
Ace
Another European stock I recommend is Ace Ltd. of Zurich. Ace sells property and casualty insurance, re-insurance and life insurance in 54 countries. Its market value is $37 billion, about $7 billion above that of Allstate.
Ace's combined ratio last year — claims paid plus expenses, as a percentage of revenue — was about 88 percent, which is very good. Of course, as a property and casualty insurer, Ace's results will vary depending on the number of major hurricanes, tornadoes and earthquakes in a given year.
Sasol
From South Africa, I would consider Sasol Limited (traded as an ADR with the symbol SSL), a coal mining, natural gas, pipeline and chemical company. It is a mature company but has been nicely profitable.
Sasol shares sell for seven times recent earnings, which is my kind of multiple. With energy prices down, the company is in cost-cutting mode, but I think the risk-benefit ratio on the stock looks good.
My results
Since 1998, I've written 13 columns — including this one — recommending a few stocks outside the country. On average, my international picks have risen 18.8 percent in a year, compared with 9.4 percent for the Standard & Poor's 500 Index.
Nine of my lists have been profitable and, coincidentally, nine have beaten the S&P 500.
Bear in mind that past performance doesn't guarantee future results. The performance of my column picks is theoretical and doesn't reflect trading costs or taxes. And the results of my column selections shouldn't be confused with actual returns I earn for clients.
Investing abroad has risks. Information can be hard to secure. Governments might be unstable, accounting practices less than rigorous, and currency fluctuations can hurt you. But balancing the pluses and the minuses, I recommend that most American investors have as much as 20 percent of their investment holdings outside the country.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston and a syndicated columnist.
