Discovering Value


Foreign Stocks on Sale

Whitney Tilson
John Heins

Investing in overseas companies has gotten easier and can help diversify your portfolio. But risks still remain in some areas.



American stock investors have historically been a rather provincial lot. Why cross borders into less-well-known territory to find investments when the world's largest and most-liquid markets, packed with dynamic, world-class companies, trade right here? We'll admit to articulating that philosophy from time to time ourselves.

But this U.S.-centric investment mentality is changing. Accounting and corporate governance practices have become more standardized globally, making the analysis of foreign companies easier and investing in them less risky. At the same time, holding foreign stocks whose fortunes are closely tied to fast-growing emerging markets -- and potentially stronger currencies over time than the greenback -- can provide useful diversification to a largely domestic portfolio.

The Counterarguments

Which is not to say that investing overseas is a no-brainer. Investors are exposed to extra risks in many parts of the world, where the rule of law and shareholders' rights are not what they are in the U.S. The foreign exposure provided by holding multinational U.S. firms is perfectly fine for many investors (see STOCK WATCH: Where to Invest for the Rest of 2011).

If you do invest in individual foreign stocks, look for bargain-priced merchandise. The growth rate of a country or region in which a company operates should have no bearing on whether its stock is a buy. What's important is the price you pay.

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Speakers at the Value Investing Congress that Whitney hosted in Pasadena, Cal., in early May offered a number of foreign-stock ideas. One interesting pick from Toronto money manager Guy Gottfried: Canadian real estate company Morguard Corp. (symbol MRC.TO). Morguard trades on the Toronto Stock Exchange at $62 Canadian (all prices are as of May 6).

Morguard's portfolio includes real estate in the U.S. and Canada, a property-management firm and a stake in a real estate investment trust. But Gottfried reckons that at today's share price, the market is assigning no value to Morguard's portfolio of owned-and-managed properties -- some 10,300 residential units and 7.1 million feet of commercial space -- which generate $152 million Canadian of operating income annually.

A more-speculative pick comes from David Nierenberg, of D3 Family Funds, a Camas, Wash., investment firm. MBAC Fertilizer (MBC.TO, $3 Canadian) is based in Vancouver and, like Morguard, trades on the Toronto exchange. But its operations are in Brazil, where it aspires to become one of the leading producers of phosphate fertilizer and serve that country's booming agricultural economy.

Nierenberg has successfully invested with MBAC's top managers in the past (when they ran Yamana Gold, a Toronto-based mining company). He believes that if MBAC meets its production goals, within five years the company could generate at least $135 million Canadian annually in earnings before interest, taxes, depreciation and amortization (EBITDA). If MBAC does so, Nierenberg says, the shares could trade well above $10 Canadian.

One of our largest holdings is Grupo Prisa (PRIS-B, $11), a leading media company in Europe, with holdings in newspapers, publishing, radio and television. Although the stock trades in the U.S. in dollars, the company is headquartered in Spain, where it generates 63% of its revenues. But it has a presence in 20 countries, many in fast-growing Latin America, where Prisa generates nearly 30% of its revenues. Prisa has new managers, who are cutting costs and selling off real estate and non-core businesses. By looking at the ratio of the stock's enterprise value (stock-market value plus net debt) to EBITDA, we believe Prisa trades at a 25% discount to its peers. On top of the potential gains as that gap closes, the shares are expected to pay dividends at an annual rate of roughly 9% over the next three years.

Columnists Whitney Tilson and John Heins co-edit Value Investor Insight and SuperInvestor Insight.



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