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5 overseas stocks set to climb
Companies in countries like India and Spain have promising growth prospects, which should push their stocks ahead of returns investors will find in the United States.
By Jim Jubak
Whether youve found the presidential campaign endlessly fascinating, endlessly repugnant or just plain endless, you have to agree that its been hard to pay attention to anything else for the last few weeks. Thats certainly been true on Wall Street, where money managers and institutional traders have been obsessed with little else. Even the price of oil, the driving force behind the stock market this fall, has had to take a backseat.
For example, on Monday, the day before voting, the price of oil in the futures market dropped more than 3% to just above $50 a barrel. This kind of volatility earlier in the year produced moves in the Dow Jones Industrial Average of 100 points or more. But Monday the Dow climbed just 27 points, or about 0.27%.
But while the U.S. stock market has behaved like the proverbial deer caught in a cars headlights, the worlds other equity markets have been moving to their own beats. So far this quarter, the Morgan Stanley Capital Index (MSCI) for India is up 2.8%, about double the 1.4% gain for the U.S. market, as Indian stocks continue to recover from their own post-election scare. The MSCI indexes for Japan and Taiwan are down 1.6% and 1.8%, respectively, this quarter on worries of higher oil prices and slowing growth in China. In good ol staid Europe, where nothing ever happens (hah!), the MSCI Spain index is up 5.8%.
While these moves have largely escaped the notice of U.S. investors locked into domestic politics, these foreign markets may indeed be better bets over the next 12 months than the U.S. stock market. So Im going to look beyond our borders to give you five overseas stocks that trade as American depositary receipts, or ADR, on U.S. exchanges -- three I recommended in my weekly Wednesday appearance on CNBCs "Morning Call" and two that are exclusive picks for CNBC.com on MSN readers. They're likely to outperform U.S. equities over the next six to 12 months.
Generating interest
Endesa (ELE, news, msgs) is the largest electric utility (measured by generating capacity) in Spain. Thats the bad news since Spanish utility stocks have been depressed this year over worries that the government would produce a draconian plan to reduce carbon dioxide emissions. The good news is that the recently released initial plan isnt nearly as bad as the market feared. Investors are starting to focus on the companys growth story in its Spanish, Italian and Latin American markets, where power generation grew by 14%, 27% and 25%, respectively, in the year's first five months.
The stock trades at 13 times trailing earnings. Endesa carries a dividend yield of 3.6%. Our StockScouter rated the shares an 8 out of a possible 10 on Nov. 3.
Cutting costs to boost earnings
Canon (CAJ, news, msgs) is riding strong demand for its laser printers and digital cameras. Like many technology companies, Canon faces falling prices that are likely to keep revenue growth to about 4% this year. But unlike most technology companies Canon looks like it'll be able to keep its profit margins steady thanks to recent moves to cut costs by moving manufacturing to low-cost countries like China and Vietnam from its home base in Japan.
The decline in the Japanese equity markets has made Canon relatively cheap, with a trailing price-to-earnings ratio of just 15. Our StockScouter rated the shares a 6 on Nov. 3.
A promising combination
Infosys (INFY, news, msgs) combines a play on the Indian market, since the company is headquartered in India, with one on the growth of the global market for information technology services. Thats not too shabby a combination.
The Indian stock market has been in recovery mode as the new government has gradually convinced investors that its serious about continuing the "free-er" market policies of the previous government. Global demand for information technology services is increasing, especially at the lower prices that come from hiring workers in India and, increasingly, China. This should keep the company's sales growth near the 48% annual average of the last five years. Standard & Poors, for example, projects that Infosys will grow sales by 46% in the fiscal year that ends in March 2005.
The stock isnt cheap, at a price-to-earnings ratio of 54 times trailing earnings. But that multiple isnt out of line for a company that has grown earnings by an annual average of 48% over the last five years. Our StockScouter rated the shares a 10 on Nov. 3.
As I did last week, Im taking a slightly more long-term view with my two exclusive picks. Chung Hwa Telecom (CHT, news, msgs) is a long-term growth story as the company adds broadband subscribers in the Taiwan telecom market it dominates. Hitachi (HIT, news, msgs) is a turnaround story as demand and pricing strengthen in the companys core markets.
Betting on wireless
Chung Hwa Telecom owns 98% of the local calling market in Taiwan. But thats not the reason to own the stock since the land-line business on the island is showing the same gradual declines as in the United States. Instead, investors should look at the companys strong wireless business, which has 8.3 million subscribers and a 33% market share. And they should look at its success in growing its Internet services business, which is already better than 20% of revenue.
The stock yields 7% and trades at a tailing price-to-earnings ratio of 13. Our StockScouter rated it a 10 on Nov. 3.
A turnaround play
Hitachi is almost two years into the turnaround plan it announced in January 2003. The company said then it would concentrate on its high-growth technology businesses in storage solutions, hard disk drives and automotive equipment. At the same time, Hitachi said it would work to improve cash flow by cutting costs and outsourcing more of its production.
So far that plan has delivered a modest improvement in cash flow from operations at $5.7 billion in the year ended in March, up from $5.5 billion a year earlier. But the trend is in the right direction. Wall Street is projecting that this cash flow improvement will turn into a big jump in earnings in the fiscal 2006. Earnings per share are projected to climb to $3.94 then from $2.66 in fiscal 2005, which would drop the stocks price-to-earnings ratio to about 24 from the current 74. Our StockScouter rated the shares a 4 on Nov. 3.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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