4 superior foreign stocks to buy

These undervalued wide- and narrow-moat names were recently added to the Morningstar Global ex-US Moat Focus Index

Susan Dziubinski 30 July, 2019 | 2:27AM

European alleyway

In a recent article, my colleague Ben Johnson argued that investors have fewer reasons than ever for maintaining "home bias" in their portfolios. What's home bias? It's investors' tendency to tilt their portfolios in favor of domestic stocks versus foreign fare. He points out that U.S. stocks constitute about 55% of the world's public equity market cap, with foreign stocks representing the remaining 45%. But most Canadian-based investors' equity allocations are nowhere close to that breakdown.

"When it comes to investing overseas, many decide to ditch diversification at the border," Johnson notes.

Granted, there are good explanations for why this historically has been the case. Among them: Investing overseas can be costly; investors feel more "in-the-know" about companies that are domiciled in their home countries; the U.S. market is less prone to corporate governance problems and political risk than some others; and domestic multinationals provide exposure to overseas markets. However, as the world becomes smaller, Johnson thinks some of these explanations have grown "flimsier" over time.

"Furthermore, in my opinion, even when considering them all together, they don't warrant the degree of home bias that exists in many investors' portfolios today," he asserts.

In a nod to going global, we're sharing some interesting--and inexpensive--foreign-stock ideas.

As a reminder, Morningstar's approach to smart stock investing applies around the globe. First, favor companies with durable competitive advantages, or economic moats. These companies should be able to fend off competition and outearn their costs of capital for years to come. Then, buy these companies when they're trading below what they're worth.

We've turned to the Morningstar Global ex-US Moat Focus Index for opportunities. This quality-focused index is a subset of the Morningstar Global Markets ex-US Index--a broad index representing 97% of developed- (ex-United States) and emerging-markets market capitalization. Morningstar ranks the wide- and narrow-moat stocks in the broad index by lowest price/fair value to find the 50 cheapest wide- and narrow-moat stocks. These stocks represent the most compelling values among the global moat universe, according to Morningstar analysts.

For this article, we focused on non-U.S. stocks that were added to the index as of the latest reconstitution in June 2019. Four of those newcomers have shares listed on U.S. exchanges (and are therefore easily accessible to Canadian investors) and are undervalued as of this writing. Stamp your passport!

List of stocks added to indexHere's a little about each.

Tencent (TCEHY) 

Chinese Internet giant Tencent has several businesses, including communication and social networking, online PC and mobile games, content, and financial technology.

"Tencent is transforming from consumer Internet to industrial Internet," says Morningstar analyst Chelsey Tam. "CEO Pony Ma believes the future of the Internet is using artificial intelligence to process Big Data in the cloud, allowing industries to aggregate and unlock value in their data. Tencent aims to help industries to connect to consumers through its platforms such as WeChat, which has over 1 billion users." Tam admits that the pivot will take time, given the firm's consumer-facing history.

Tencent's wide Morningstar Economic Moat Rating and stable moat trend are supported by the network effects around its massive user base, as well as intangible assets stemming from the company's substantial collection of user behavior data and content/intellectual property ownership.

This high-uncertainty stock is about 30% undervalued today according to our metrics, trading at 4-star levels.

China Mobile (CHL) 

The largest telecom operator in the world, China Mobile boasts more than 925 million subscribers, with 61% of the 4G telecom market in China and 60% of the total wireless market. We think the firm has carved out a stable, narrow economic moat. Its large subscriber base allows it to keep its subscribers' calls on its own network, which stifles costs and allows it to generate burly free cash flows, says Morningstar director Dan Baker.

"The Chinese government is the main reason we don't believe China Mobile has a wide economic moat," he explains. "The Chinese government is the firm's controlling shareholder, customer, regulator, and competitor. As the government also controls its two competitors, China Unicom and China Telecom, it wants a more even distribution of customers."

Though China Mobile had a head start on its 4G network rollout, competition has become more aggressive. We expect the company to maintain earnings growth at low- to mid-single-digit rates annually in the medium term, says Baker.

This medium uncertainty stock is trading about 28% below our fair value estimate as of this writing, placing it in 4-star territory.

Anheuser-Busch InBev (BUD) 

The largest brewer in the world recently made headlines by announcing that it was selling its Carlton & United Breweries to Asahi for $11.3 billion. While we think that the deal is a bit better financially for AB InBev than for Asahi, we maintained our $118 fair value estimate on the brewing giant on the news.

AB InBev boasts one of the strongest cost advantages among the consumer defensive stocks we cover, notes Morningstar director Philip Gorham. Moreover, it's one of the most efficient operators in the space. Its wide, stable economic moat stems from a cost advantage versus its peers and its intangible assets.

"Highly effective cost strategies are at the core of AB InBev's success," argues Gorham. "The firm has been acquisitive, having made transformative deals for Interbrew and Anheuser-Busch, and more recently acquiring Grupo Modelo, Oriental Brewery, and SABMiller. Management's playbook is to buy brands with a promising growth platform, expand distribution, and ruthlessly squeeze costs from the business." In fact, management is so good damping costs and allocating capital that we've awarded it an Exemplary Morningstar Stewardship Rating.

This low-uncertainty stock is about 20% undervalued today, landing it in 5-star territory.

ABB (ABB)

Based in Switzerland, this global supplier of electrical equipment and automation products has an enviable base of robotics and automation customers, solidly positioning it to benefit from the "Industrial Internet of Things," says Morningstar director Denise Molina. The number one or two supplier in all of its core markets, ABB's wide moat and stable moat trend stem from switching costs and intangible assets.

"Both its robotics and industrial controller (used to program equipment) products have leading market share and enjoy loyal customer bases that would be difficult for competitors to capture," Molina observes. "Furthermore, ABB's electrification products division offers some overlap with other customer segments, such as process industries, that could prove useful in cross-selling the automation portfolio."

Growing demand has forced ABB and its competitors to regularly refresh their products--which the firm has been slow to do. Moreover, its software strategy lags that of some of its competitors. We nevertheless expect the firm to outearn its cost of capital for the next 20 years.

This medium-uncertainty stock trades 25% below our fair value estimate as of this writing, placing it in 4-star range.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
ABB Ltd ADR19.16 USD1.00
Anheuser-Busch InBev SA/NV ADR93.03 USD-0.27
China Mobile Ltd ADR42.06 USD-0.19
Tencent Holdings Ltd ADR805.00 USD-0.01

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Susan Dziubinski

Susan Dziubinski  Susan Dziubinski is director of content for Morningstar.com.