Four stocks for a worldly portfolio

In a globalized economy, opportunities abound beyond our borders.

Vikram Barhat 1 December, 2015 | 6:00PM
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Note: This article is part of Morningstar's 2015 Global Equities Week special report.

Regional divergence in equity-market returns underscores the need for investors to hunt for opportunities beyond their national borders.

As a strategic investment approach, geographic diversification allows investors to tap into a much broader opportunity set. Spreading investments across a wide range of regions also helps negate or neutralize the impact of poor economic performance in just one area of the world.

Based on Morningstar research, the following stocks could provide investors with some long-term growth opportunities as well as portfolio diversification. Spanning across geographies and sectors, these companies have sound fundamentals with substantial future growth prospects. Moreover, these stocks are trading at a discount to their fair value, offering strong upside potential.

China Mobile Ltd. ADR
Ticker CHL
Current yield 3.24%
Forward P/E 12.0
Price US$57.82
Fair value US$70
Data as of Nov. 27, 2015

With a staggering 817 million subscribers,  China Mobile (CHL) is the largest telecom operator in the world. The firm is rolling out its 4G network faster than its Chinese competitors and has cornered 58% of the domestic 3G/4G telecom market and 63% of the total wireless market.

China Mobile had an impressive third quarter. Its revenue was up 6.5% year on year, while earnings before interest, taxes, depreciation and amortization (EBITDA) rose 9.1% and net profit after tax jumped 3.4%. The performance prompted Morningstar equity analyst Dan Baker to forecast 10% to 11% average annual earnings growth for the next five years.

The stock is currently trading at a discount of almost 15% to its fair value estimate of US$70 per American Depository Receipt (ADR). The stock at its current price is slightly undervalued, and remains one of Baker's preferred telecom stocks in the region. "In addition, China Mobile has had about a 12-month head-start on its 4G network rollout [against its competitors], with 720,000 4G base stations by end 2014 and 1 million planned by 2015," he added.

The company has the strongest balance sheet among telecom companies worldwide, according to a Morningstar report that noted the firm had US$70 billion in cash at the end of June 2015.

Novartis AG ADR
Ticker NVS
Current yield 3.11%
Forward P/E 16.7
Price US$85.84
Fair value US$100
Data as of Nov. 27, 2015

The Swiss pharmaceutical company  Novartis AG (NVS) develops and manufactures health care products in branded and generic pharmaceuticals, eye care and consumer segments.

New drug launches by Europe's biggest drugmaker -- cardiovascular drug Entresto and immunology drug Cosentyx -- have had "an excellent start and should post peak sales of over US$5 billion and US$2 billion, respectively," said Damien Conover, sector director with Morningstar's equity research team, in a report.

The report projects operating margins of the Basel-based company to "expand 200 basis points in 2015" as a result of cost-cutting, portfolio restructuring and the divestiture of the low-margin animal health group and the creation of a consumer joint venture with GlaxoSmithKline."

At the current price, Novartis looks undervalued for the first time since mid-2013, said Conover, who recently upped the stocks fair value to US$100 from US$95 per share. "The investment community appears to be undervaluing the company's pipeline and recently launched drugs," he said. "We continue to stand behind Novartis's wide moat rating, which is supported by a robust lineup of patent-protected drugs and a developing pipeline."

Tata Motors Ltd. ADR
Ticker TTM
Current yield -
Forward P/E 6.0
Price US$31.03
Fair value US$41
Data as of Nov. 27, 2015

Indian automaker  Tata Motors (TTM) owns iconic brands Jaguar and Land Rover as part of a large product portfolio which includes micro-compact cars, sport utility vehicles, luxury passenger vehicles and large semi trucks. The company also operates 16 production facilities in nine countries, with sales distribution in more than 100 countries across five continents.

Tata Motors benefits from substantial profitability and returns generated by its premium brands Jaguar and Land Rover, which contribute substantially to the firm's competitive advantage. "Over the past five years, Jaguar Land Rover's revenue has grown at a compound annual rate of 40%, with global volume growing 21%," said Morningstar equity analyst Piyush Jain in a report.

Jaguar and Land Rover accounted for 43% of Tata's total vehicle sales in 2014, and 103% of earnings before interest, taxes, depreciation and amortization (EBITDA), said the report.

Jain says the firm's Indian business enjoys low-cost advantage driven by low labour costs and the favourable tax structure for the domestic manufacturers. Jain projects an annualized revenue growth of 9%, and five-year adjusted EBITDA margin of 15.6%, "as the Indian vehicle market rebounds and JLR's volume growth and profitability normalize."

Time Warner Inc.
Ticker TWX
Current yield 2.01%
Forward P/E 13.2
Price US$69.78
Fair value US$94
Data as of Nov. 27, 2015

U.S.-based media and entertainment behemoth  Time Warner (TWX) owns several television networks, including HBO, CNN and TNT. Its filmed entertainment segment, which includes the major motion-picture studio Warner Bros., creates and distributes movies and television programming for both internal and external distribution outlets.

The company's rich content catalogue includes popular movie franchises like Harry Potter and TV shows such as Friends and The Big Bang Theory.

Time Warner's cable networks are among the most widely watched and generate about 50% of consolidated EBITDA through a steady stream of affiliate fees and advertising dollars, according to a Morningstar report.

The company's leading premium cable channel HBO generates 25% of EBITDA and "will continue to prosper as the outlet of choice for creators of original programming, supplemented by its exclusive deals with several major movie studios," the report noted. Morningstar equity analyst Neil Macker credits continued growth in demand for the company's quality content -- both new and old programming -- for steady cash generation.

Macker pegs the stock's fair value at US$94 and projects "overall average annual revenue growth of 4.3% through 2019" and forecasts overall operating margins to improve from 22.3% in 2014 to 25.6% in 2019.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Novartis AG ADR102.57 USD-0.12Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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