As a sound investment approach, geographic diversification of portfolio allows investors access to a broader opportunity set beyond their national boundaries. The need to hunt for investments further afield has never been more pressing than in today’s environment of geopolitical and economic uncertainty.
Timing becomes even more compelling when one considers that the U.S. market has climbed steadily this year, pushing valuations higher. Moreover, the fact that many industry watchers predict superior performance for non-U.S. equities compared to their American peers over the next 10 years creates added incentive for investors to look overseas.
The following high-quality investing ideas from across geographies and sectors are part of the Morningstar Global Markets ex-US Index. For investors with some risk appetite, these names represent long-term growth opportunities and portfolio diversification. Not only do these businesses boast sound fundamentals and long growth runway, their stocks are trading at a meaningful discount to their fair value, according to Morningstar research.
| Telefonica SA ADR | ||
| Ticker: | TEF | |
| Current yield: | 5.46% | |
| Forward P/E: | 9.66 | |
| Price: | US$8.38 | |
| Fair value: | US$14.5 | |
| Value: | 42% Discount | |
| Data as of Apr. 11, 2019 | ||
Telefonica (TEF) is the biggest fixed-line and wireless telephone operator in Spain and is one of the largest telephone operators in the world. With total fixed and wireless telephony, internet, pay-television, and wholesale accesses of 343.9 million, the company is the second-largest wireless operator in the U.K., the largest wireless operator in Germany, and has a major presence in Latin America.
The firm dominates its home country Spain with 60% market share in fixed-line, 44% in broadband, and 31% in wireless telephony, and is replicating this strategy of convergence -- bundling of multiple services -- in Latin America. The company’s scale helps spread its fixed costs over a large number of subscribers.
Further, the company's push into converged services “positions it well to benefit from this momentum-growing trend,” says Morningstar equity analyst, Allan C. Nichols, who puts the stock’s fair value at US$14.50 per American Depository Receipt, or ADR.
Telefonica has spearheaded building out of fibre-based network to increase broadband speeds in Spain which “sets it up for continued long-term growth,” says Nichols, who remains “more bullish than consensus on the company's ability to increase its revenue.”
| BAE Systems PLC ADR | ||
| Ticker: | BAESY | |
| Current yield: | 3.46% | |
| Forward P/E: | 11.30 | |
| Price: | US$26.71 | |
| Fair value: | US$33 | |
| Value: | 20% Discount | |
| Data as of Apr. 11, 2019 | ||
The U.K.-based leading defence contractor, BAE Systems (BAESY) generates more than 75% of its revenue outside its home country. One of the six largest suppliers to the U.S. Department of Defense, the firm’s main business segments include electronic systems (19% of 2017 revenue); cyber and intelligence (10%); U.S. platform and services (16%); air (38%); and maritime (15%).
“The company’s strong competitive positions in high-end defence markets in the U.K., the U.S. (especially the land segment), and Saudi Arabia should result in returns on invested capital exceeding the cost of capital for many years,” says a Morningstar equity report. As a dominant-- in many instances, the only -- player in these markets, BAE enjoys an unbeatable advantage. The firm will benefit from increasing defence budgets around the globe, particularly in the U.S. “BAE’s 17% exposure to the United States’ US$400 billion F-35 programme will support earnings for years to come,” says Morningstar sector director, Denise Molina, who appraises the stock to be worth US$33 per ADR.
The company also drives growth through acquisitions and portfolio rebalancing and delivers shareholder returns in the form of share buybacks and dividend increases. “The firm is diversifying its book of business to cyber and commercial, which we expect to generate growth for the firm,” notes Molina.
| Roche Holding AG ADR | ||
| Ticker: | RHHBY | |
| Current yield: | 3.14% | |
| Forward P/E: | 15.04 | |
| Price: | US$33.84 | |
| Fair value: | US$42 | |
| Value: | 19% Discount | |
| Data as of Apr. 11, 2019 | ||
A leading biopharmaceutical and diagnostic company, Roche (RHHBY) sells a variety of oncology therapies from acquired partner Genentech, while its diagnostics business gained heft after the acquisition of Ventana in 2008. Oncology products account for 60% of pharmaceutical sales, and professional diagnostics contribute more than half of diagnostic-related sales.
Roche’s biologics focus and innovative pipeline help maintain its wide moat and continue to drive growth as patent expiration start to erode current blockbuster drugs, the report says. “More than 80% of Roche’s top pharmaceutical sales are from biologics, which provides a buffer against generic competition,” says Morningstar sector strategist, Karen Andersen, who projects a 4% top-line annual growth rate for the pharmaceutical division through 2022.
The healthcare behemoth’s diagnostics business is also strong, placing the company far ahead of its industry peers. “The firm has a promising strategy of combining its expertise in both areas [therapeutics and diagnostics] to generate a growing personalized medicine pipeline, making use of companion diagnostics,” says Andersen, who estimates the stock to be worth US$42 per ADR.
| LINE Corp ADR | ||
| Ticker: | LN | |
| Current yield: | - | |
| Forward P/E: | 196.08 | |
| Price: | US$34.03 | |
| Fair value: | US$49 | |
| Value: | 31% Discount | |
| Data as of Apr. 11, 2019 | ||
A leading mobile messaging app in Japan, Line (LN) enjoys strong following in its home country as well as in Taiwan, Thailand, and Indonesia. It had 168 million monthly active users in four major countries, at the end of 2017.
Approximately 75% of revenue comes from Japan where it was introduced in 2011. The app’s easy interface immediately attracted smartphone users and soon replaced carrier email/SMS as a communication tool,” says a Morningstar equity report, that says that it has been transforming from a pure messaging app to a portal through adding more content and services, including news, TV, payment and taxi booking services.
Line’s made solid progress in monetizing mobile games (17% of total revenue), stickers (14%), and advertising (52%), which led Morningstar equity analyst, Kazunori Ito, to assert: “We are positive on the firm’s potential to increase advertising revenue.” He projects the firm’s revenue share from Japan to grow from 75% at present to 82% in 2021.
