These Overseas Stocks Will Triumph
Larry is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the U.S. dollar’s appreciation continues, Americans’ making money from foreign companies is tougher. But some overseas businesses are doing so well and have such great prospects that their stocks are worth buying, even if exchange rates don’t favor them at the moment. There are three terrific companies from Brazil, South Africa and Israel that I have my eye on currently.
The dollar’s surge is due to nervous overseas investors seeking the relative safety of U.S. Treasury securities. This is temporary: a port in the storm as opposed to a permanent mooring. But over the long term, the U.S. dollar will resume its century-long decline against global currencies. The current administration seeks to keep the dollar weak to increase demand for American exports.
The following fine trio of companies is not helped in the short term by the strengthened dollar, regardless of their overriding fundamental strength. According to the Dollar Spot Index, the buck is up 7.5% against world currencies in the past 12 months. The greenback’s most notable gain is against the euro, climbing 14% since this time in 2011. The Brazilian real and the South African rand are hurt, and one of our firm’s clients recently asked us if any of these currencies are at risk for “free fall” – that is, a 30-50% decline.
We believe that they are not at risk because 1) the overall economies are fundamentally sound, with much less debt overall than developed western economies; 2) they already trade close to their five-year lows and 3) most are resource-rich.
As long as countries such as China and India have demand for resources to continue their growth, resource-rich countries will have export-support of their currencies. This is bolstered by the fact that most commodities are priced in dollars. As demand pushes commodity prices higher, the dollar often loses value relative to other currencies, allowing foreign purchasers to afford the extra dollars needed to participate in an orderly market.
Worthy of a look
Companhia Energetica de Minas Gerais or CEMIG (NYSE: CIG) is Brazil’s largest utility. By last fall, the U.S.-listed shares were down approximately 10% while the Brazilian-listed shares were up 10%. The difference, of course, is due to the depreciation in the Brazilian real. A temporary currency swing that results in a stock price decline like this has nothing do with the underlying conditions of the business.
CEMIG is a very well-run company, operating in a very favorable economic and regulatory environment. It has historically provided double-digit return on equity and earnings per share growth, with a high dividend yield. But this year, the real continues to fall versus the dollar, down close to 9%. CEMIG’s Brazilian-listed stock rose 32%, while the U.S.-listed security increased 20%, with the currency depreciation accounting for most of that difference. This should reverse once the dollar weakens. CEMIG currently trades at 9.9 times 2013 earnings estimates and pays a 6.9% dividend.
Tiger Brands (NASDAQOTH: TBLMY.PK) is South Africa’s largest food company. It produces everything from mayonnaise, mustard, peanut butter, cereal, biscuits and canned tomatoes, to packaged rice and sports drinks. Many of its products are the most recognized brands in the region, and it sells them in South Africa as well as neighboring sub-Saharan countries. With a growing middle class, having higher incomes and increasing food standards and desires, this is a very interesting company operating a necessary business.
Tiger Brands currently trades at 12.4 times next year’s estimated earnings and pays a 3.5% dividend yield. It is well capitalized and has historical long-term double-digit ROE and EPS growth. Its U.S.-listed shares are down about 12% more than its South African-listed shares, primarily due to the strengthening of the dollar versus the rand. We do not anticipate this to be a long-term impairment.
Teva Pharmaceutical Industries (NYSE: TEVA) is the largest producer of generic drugs on earth. With the increasing cost of medicine, an aging population in the developed parts of the world and a growing population with greater access to medicines, the generic drug producers should benefit.
Headquartered in Israel, the company concentrates on the central nervous system, oncology, pain, respiratory, women’s health and biologics. But Teva’s stock price has declined for the last two years.
Over the last five years, during a time when its EPS grew by almost 37% per year, Teva’s valuations contracted from a high of 56.8 times earnings to the current 12.1. A strong foray into Europe fizzled when nations there mandated drug price cuts. The company suffered manufacturing problems.
It trades at 6.5 times 2013 earnings estimates and pays a 2.4% dividend yield. We believe this company to be one of the most undervalued opportunities available today. Teva has taken steps to support its stock price, including increasing dividends and initiating a share buyback program. It also entered a consumer products joint venture with Procter & Gamble, and on May 30 moved its U.S. stock listing from Nasdaq to the New York Stock Exchange, which it believes will give it better market visibility.
Under the helm of its impressive new chief executive, Dr. Jeremy M. Levin, Teva’s major obstacles are behind it and its stock valuations should return to a normal valuation. If current earnings estimates come through, the two-year return would be 86%.
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Partners Mark J. Foley and Tina Larsson manage the Pendo International Strategy for international investment specialist Pendo LLC in New York City. Their firm holds long positions in these stocks.
AdviceIQ has long positions in TEVA, TBLMY, and CIG. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
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