Broadening your investment horizon

Four reasons to look abroad for bargains
By Eric Uhlfelder, Investing Across Borders

For the Financial Times, March 27, 2002

Many U.S. investors do not bother with foreign stocks for two reasons: domestic markets offer plenty of opportunities and researching foreign stocks is too difficult. Both beliefs are mistaken.

There are four main reasons for investing abroad. The first is simply to increase choice. The second, across nearly every industry - banking, insurance, industrials or telecommunications - global operations are rendering a corporate domicile increasingly irrelevant.

Third, as markets deregulate abroad, investors can discover foreign companies with far greater growth potential than can now be found in the US. Expensive, inflexible labor markets across Europe helped sustain the continent's high unemployment rates through the early 1990s. However, increasing trade union and government acceptance of temporary positions not only helped create new jobs but the world's largest temp agency, the Swiss-French firm Adecco.

The fourth reason is that foreign companies may excel in certain businesses that simply have not matured in the US. One of the most compelling examples is the essential business of water. With nearly 95 per cent of the US water market still regulated, the states have not produced any industry leaders. Because of domestic opportunities created more than a century ago, France is home to two global water industry leaders, Vivendi Environnement and Suez. The need for improved water quality and infrastructure across the globe and governments' inability to directly finance such improvements speak of the tremendous opportunities for experienced companies.

"Large brokerages and institutional investors do not aggressively track non-brand name foreign stocks because of liquidity constraints and the limited boost their smaller scale can give to large portfolios," says Michael Molinski, president of Investing Across Borders, a San Francisco-based financial media and research group. "This means the individual investor has an opportunity for finding a good story before the rest of the broad market does."

But how does one find undiscovered stocks, and verify that the company is the real thing?

Start by looking at public companies with whom you may actually do business, and scan periodicals with an eye for the obscure story.

On November 11 1999, the Economist ran a short article in its back pages entitled, "Avoiding peanuts: as deregulation sweeps across Europe, Ryanair, a low-cost Irish airline, is adding to the pressure on Europe's big airlines." At the time, investing in a Dublin-based budget airline hardly seemed compelling. But the article spelled out why corporate revenues and profits were soaring and would likely continue to do so, revealing operating margins that were hitting the rest of the airline industry.

Since the story appeared, the stock is up nearly 150 percent, driven by the sustained logic and transparency of Ryanair's business model.

After coming across such a story, investors must then ask: Is this as good as it sounds? Where are the potential pitfalls? Does the market know and understand it? And am I too late?

To verify the basic facts, check a foreign company's website that includes complete financials. Or visit www.corporateinformation.com, a compendium of international company data.

Investors should then do a search to see whether any financial periodicals have already reported on the company. Public and academic libraries can offer access.

The next step involves analyst reports and consensus estimates. While investors have become highly skeptical about the value of these reports, analysts still offer the most thorough corporate reviews. But investors must be careful to discern facts from opinions.

Full-service and discount brokerages provide clients with free access to proprietary research, but it is necessary to review a range of reports to get a more complete corporate picture. Investors can access thousands of free and pay-per-view reports through Thomsonfn.com and Multex.com.

Comparing reports will also reveal the different assumptions on which analysts base their opinions. For example, is the strong growth forecast for an airline based on expanding gross domestic product, deregulation, or collapse of competition? Numbers alone are not enough. Look at the underlying reasons for key aspects of an analyst's opinion to see which arguments make the most sense. And while strong consensus is encouraging, it does not necessarily mean a thing - as Enron revealed.

Investors should know a company's largest shareholders. Major institutional and management positions are found in annual report footnotes and in quarterly Securities and Exchange Commission filings. Companies must also release information on significant management trades throughout the year.

Further, investors can see if specialized mutual funds have locked on to a company. For instance, with Suez, look into the holdings of utility and European funds. This can be done by visiting fund websites or Morningstar.com, the mutual fund tracking company.

"Individuals can unearth profitable investments, but it requires a disciplined approach," says David Abramson, managing editor of European strategy at BCA Research, the independent market adviser based in Montreal. "That means not only understanding the business model, but the key macroeconomic, industry and competitive risks."