Investors who are focused on which US companies can survive—and even thrive—amid the global pandemic are missing attractive stock opportunities among foreign companies, says fund manager Richard Clattenburg, CFA. These companies are helping parts of the world deal not only with the pandemic but also other challenges, including persistent political and economic tensions between the US and countries ranging from France to China…issues emanating from the British exit from the European Union…and the negative effects of low interest rates.
Bottom Line Personal asked Clattenburg to describe some of the best and most overlooked foreign stock opportunities now…
To find great foreign stocks these days, I look for what I call mispriced growth companies. These businesses, in countries facing big challenges that have scared off many investors, still are able to produce strong revenue and earnings growth. Adding one or more of these stocks can help diversify a US-heavy portfolio and boost long-term investment returns.
The challenges and the stocks that benefit from them…
Challenge: The coronavirus. The pandemic has vastly increased demand for various services in foreign countries as it has in the US. That’s why I’m following a similar playbook regarding what has worked for US investors so far—investing in companies that provide these services.
Three companies that provide services that are in increasing demand…
DiaSorin (DSRLF) is an Italian life-sciences company specializing in diagnostic-testing equipment and instruments for infectious diseases such as tuberculosis. It quickly adapted its technology this year and now handles millions of tests in European countries for the presence of coronavirus and tests for antibodies in patients who have recovered. In the first quarter of 2020, its molecular diagnostic test sales rose nearly 50% compared with the first quarter of 2019. Despite a 54% gain in share price this year through July 24, the stock has more room to rise.* Recent share price: $202.18.
TeamViewer (TMVWY) is a German company whose software has been used on more than two billion computers and mobile devices, allowing employees in Europe and Asia who are working remotely to videoconference and collaborate online. TeamViewer’s revenue shot up 185% year-over-year in the first quarter of 2020. Recent share price: $26.72.
Naver (NHNCF) operates the leading online search engine in South Korea, accounting for nearly 75% of all searches in the country. Its smartphone messaging app has more than 600 million users throughout South Korea, Japan and the rest of the Asia-Pacific region and about 25 million in the US. First-quarter sales were up 14.6% year-over-year. Recent share price: $234.70.
Challenge: The clash over NATO defense spending. The US has pushed other NATO members to live up to their 2014 agreement to spend at least 2% of gross domestic product (GDP) on defense by 2024, a goal that would require hundreds of billions of dollars in military hardware purchases over the next few years. Defense contractors based in some NATO countries are benefiting.
A company that is helping European countries fulfill their defense needs…
Thales (THLLY). The French company is one of Europe’s largest defense contractors, with the leading position in defense electronics and cybersecurity in Europe. In the first quarter of 2020, new orders for Thales equipment were up 17% year-over-year, and Thales recently won a share of a contract with France and Germany worth as much as $4.5 billion by 2026 to help develop a new European fighter jet. These developments should help reverse the 27% plunge in the Thales stock price so far this year. Investors have worried that the Thales commercial aircraft business, which makes landing gear, will be hurt by declines in the global airline industry, but the company gets just 12% of its annual revenue from airlines. Recent share price: $15.47.
Challenge: Very low interest rates. Government bond yields around the world have shrunk as central banks have dropped interest rates to help stimulate their economies. A 10-year bond recently yielded just 0.36% in Spain…negative 0.47% in Germany…and negative 0.51% in Switzerland. (A negative yield means an investor is getting less money when a bond matures than the original purchase price of the bond—so in effect the investor is paying to have the government store the money.)
Low yields have created an enormous problem for older, conservative investors who need investments that produce safe, reliable income. Instead of bonds, those investors are turning to European blue-chip companies that pay relatively attractive dividends.
A Swiss blue-chip company that income-starved European investors are turning to…
Nestlé (NSRGY). The 154-year-old food and beverage giant’s dividend was recently yielding 2.34%. Even in the midst of the pandemic, Nestlé increased its dividend for a 25th consecutive year. The company, whose valuations are more attractive than many comparable US blue chips, has been able to maintain and even grow sales during the global recession because it has some of the world’s most iconic and recession-proof brands. They range from Purina pet food and Cheerios to Häagen-Dazs and Nescafé coffee. Recent share price: $118.33.
Challenge: China-US tensions. Trade relations between the world’s two largest economies have further deteriorated this year amid increased political tensions. The US has accused China of holding back information about the coronavirus outbreak and has enacted legislation to impose sanctions on Chinese officials and companies in response to the crackdown on democratic freedoms in Hong Kong. Also, the US has revoked the preferential trading status for Hong Kong that has been in place since 1992…and ordered China to close its consulate in Houston over charges of economic espionage activity. The protracted trade war between China and the US has hurt Chinese exporters that account for about 20% of China’s annual GDP. And in July, the US Senate approved legislation that could delist some of the 170-plus Chinese companies trading shares on US markets if they lack accounting transparency and/or they are found to be controlled by the Chinese government.
Chinese companies that can thrive even through a long US-China trade war: Although some investors may not invest in China amid the growing tensions, various Chinese businesses are fairly insulated from international trade.
E-retailing giant Alibaba Group (BABA) and Tencent (TCEHY), which provides social-networking and ecommerce services to more than a billion Chinese users, both reported 20%+ increases in revenue year-over-year for the first quarter of 2020 amid the coronavirus outbreak. Neither relies much on the US for revenue, and both should continue to grow even if Chinese domestic growth remains sluggish. Also, Tencent and Alibaba have existing listings on the Hong Kong Exchange, which helps protect them from the risk of US delisting. Recent share prices: BABA, $249…TCEHY, $68.82.
Challenge: Brexit. The United Kingdom technically withdrew from the European Union (EU) on January 31 but has until the end of the year to work out a permanent trade deal with the EU. Otherwise, the UK’s tariff-free trade status with other EU members could end, a move that might derail any British economic recovery. With the UK in such economic limbo and the lingering effects of the pandemic, the MSCI UK stock index has plunged 22.7% this year, compared with a drop of 5% for an MSCI stock index covering much of the rest of Europe. However, I’m finding innovative British companies whose growth doesn’t depend on the UK’s domestic economy because they operate on a global level.
A British company that can do well regardless of how post-Brexit trade deals work out…
Farfetch (FTCH) is a British e-commerce company whose online sales of luxury items such as Gucci sneakers and Burberry bags in more than 190 countries should continue to rise regardless of the outcome of the Brexit talks. Its revenue for the first quarter of 2020 jumped 90% to $331 million. The stock’s price, which doubled this year, is still attractive. Recent share price: $21.37.
*All performance figures are through July 24, 2020.