The World's 10 Best Stocks
Thanks to globalization, the world is becoming a smaller, more interconnected place. For example, U.S. investors pay attention to China's voracious appetite for oil and other commodities, and we grow anxious when Europe's debt markets go haywire. Borders are becoming less important when it comes to stocks, too. "Where a stock is listed is becoming almost irrelevant," says Sarah Ketterer, co-manager of Causeway Global Value Fund.
At Causeway and other investment firms, analysts who have spent their careers following U.S.-based drug makers or banks or airlines are now looking for the most-compelling firms at the most-attractive prices all over the world. "To make good stock decisions, you'd better have a global perspective," says Bob Turner, co-manager of Turner Core Growth Fund.
What matters, says Ketterer, is not where a company is headquartered but where it generates its revenues and profits and where future growth opportunities lie. For instance, tobacco giant Philip Morris International is based in New York City, but it generates 100% of its sales abroad. Teva Pharmaceutical, the world's biggest seller of generic drugs, is based in Israel but books most of its sales in the U.S. and Europe.
We thought it was time to engage in some global stock selection of our own. We have assembled a list of five stocks -- five based in the U.S. and five overseas -- that are global leaders in their industries. In addition to looking for strong profitability, finances and management, we sought companies with bright long-term-growth prospects -- which in several cases stem from high exposure to emerging markets. Finally, we focused on stocks that may not be cheap but are at least trading at prices that appear attractive relative to the companies' commanding market positions and long-term business prospects. We list them alphabetically by the countries in which they're based. All of the foreign stocks trade in the U.S. as American depositary receipts. Prices and related data are through December 3.
Peter Baughan, co-manager of Harding Loevner Global Equity, identifies firms that can tap into long-term-growth themes. Sad to say, he's found one such theme in diabetes, a disease that is expanding worldwide in epidemic proportions. His play on this scourge caused by modern diets and lifestyles is Novo Nordisk (symbol NVO), the leader in diabetes care, with just over half of the global market for insulin.
As people gain weight and consume more sugar in their diets, the pancreas can no longer produce enough insulin to break down that sugar. By the end of this decade, UnitedHealth recently estimated, half of all adult Americans will be diabetic or pre-diabetic unless we suddenly change our diets and lose weight. The incidence of diabetes is also exploding in countries such as India and China, where diets and lifestyles are shifting abruptly as people see their incomes rise.
Unlike its diversified competitors in the synthetic-insulin business (the U.S.'s Eli Lilly and France's Sanofi-Aventis), Novo Nordisk benefits from its laserlike focus on diabetes. It plows 15% of sales each year back into research, which generates contraptions, such as pen-delivery systems for insulin, and new drugs, such as Victoza, a once-a-day insulin shot that, as a positive side effect, promotes weight loss.
The economic news from Japan is so uniformly grim that it's easy to forget that the country is still home to many competitive manufacturers of innovative, high-quality consumer, office and industrial products. Canon (CAJ), a world leader in printers, copiers, high-end cameras and semiconductor-making equipment, exemplifies Japan's prowess in precision engineering and product miniaturization.
With a powerful global brand, Canon generates about 80% of its sales outside the moribund Japanese economy. And Rob Taylor, co-manager of Oakmark Global Fund, likes that 30% of Canon's revenues come from royalties (for example, every Hewlett-Packard laser printer uses Canon technology) and products, such as ink cartridges, that customers buy repeatedly. Canon has $9 billion of cash on its balance sheet and no debt. And it has been repurchasing shares -- unusual for a Japanese company. By Taylor's calculation, Canon sells at a steep discount to his estimate of its true worth. In addition, the stock yields 2.4%.
When you combine superb German engineering with ruthless, American-style cost cutting, you create a formidable competitor. That's the story of venerable Siemens (SI, a lumbering giant no more. "Siemens is going through the greatest transformation since the beginning of the company 163 years ago," says David Marcus, manager of Evermore Global Value Fund.
Siemens's decision to cut head count, close plants and exit weaker businesses in which it's not the number-one or -two player accelerated after Austrian Peter Lšscher became chief executive in 2007, the first outsider to become CEO in the company's history. "Lšscher makes changes, not excuses," says Marcus. Productivity and profit margins are surging, and earnings are way up despite only modest growth in sales.
Siemens is a global force in capital goods, such as industrial-automation, power-generation and transportation equipment. In the quarter that ended September 30, for example, the company landed orders to supply Amtrak with 70 locomotives and to build a steel mill in Brazil and a power plant in India. Siemens also has important businesses in medical equipment, auto electronics and lighting. Over the past five years, revenues from emerging markets have risen from 19% to 30% of total sales (Germany accounts for only 15% of Siemens's business). The company is focusing its expansion efforts on Asia in particular.
If you're a purveyor of food, drink, toothpaste or shampoo, it's no secret that developing nations are where the growth is. You can tap into that demand with Coca-Cola, which blankets the globe. Or you can focus on fast-growing Latin American countries by investing in Coca-Cola Femsa (KOF), the world's largest Coke bottler outside the U.S. "Coke Femsa is a great way to play consumer spending in emerging markets," says Evermore's Marcus.
Coca-Cola Femsa, 32% owned by Coca-Cola, already dominates Mexico, whose citizens drink 60% more Coke beverages per capita than do U.S. residents. The big growth opportunities are in fast-growing markets such as Brazil, Colombia and Panama, where Femsa is redeploying surplus cash from Mexico. Increasingly, the region's young, fast-growing population has the means to spend on brand-name beverages.
The bottler, which accounts for one-tenth of Coca-Cola's global volume, recently entered a joint venture with the Atlanta company to sell noncarbonated beverages, such as juices and sports drinks, in Latin America. Marcus thinks that Coke Femsa, known as an excellent operator, will be a large beneficiary of the parent company's push to consolidate its bottling operations among fewer but larger bottlers.
When you mix Asia's rapidly spreading affluence with the region's cultural affinity for brand-name luxury goods, you have a mouthwatering recipe for Richemont (CFRUY), owner of such well-known lines as Cartier and Van Cleef & Arpels jewelry, Piaget watches, Montblanc pens, and Alfred Dunhill leather goods. In the first half of Richemont's current fiscal year, which ended September 30, the firm's Asia-Pacific sales excluding Japan surged 50%, to 36% of total sales (Japan accounted for another 11% of revenues). In fact, the company (formally known as Compagnie Financire Richemont) has struggled to keep up with brisk demand for its watches and jewelry. Says Wintergreen Fund's David Winters: "When people get richer, they like to look sharp and adorn themselves with baubles that say 'Look at me. I'm a success.'"
Controlled and run by Johann Rupert, a low-profile South African billionaire, Richemont establishes a retail presence for brands such as Cartier wherever wealth is minted. Winters says that Richemont's accounting is extremely conservative, and he expects earnings, which are understated, to climb at an annual rate of about 15% for years to come.
Our first homegrown name, Apple (AAPL), needs no introduction. Its steady stream of imaginative, hit products, such as iTunes, the iPhone and the iPad, have redefined industries and made competitors such as Microsoft and Sony look slow and clumsy by comparison. The key questions about the stock's prospects are whether a company as large as Apple can keep growing at a breakneck pace and whether the shares still offer value at today's lofty price of $317.
The answer to both questions is yes, says fund manager Turner. The Cupertino, Cal., company, he says, is front and center in the smart-phone industry, which is expanding by 25% a year, and in tablet computing, which will grow at an even faster rate. "People are underestimating the potential of tablets, which are a transformational event in computing," says Turner. He thinks Apple could earn $21 a share in the fiscal year that ends next September, about 8% more than analysts' average forecast. If he's right and if you deduct the company's cash pile of $55 a share from the stock's price, Apple trades at 13 times earnings. That's awfully cheap for a high-quality company that's expected to generate annual earnings growth of 20% over the next three to five years.
Business looks good at Disney (DIS) on both a cyclical and a long-term basis. Consumers are spending again in its theme parks and on its cruise ships. TV ad rates are rising, and the movie studio has turned out hits such as Toy Story 3, the first animated film ever to gross $1 billion. ESPN, Disney's sports-TV juggernaut, is immensely profitable. "The ESPN franchise cannot be replicated," says Cory Gilchrist, co-manager of Marsico Global Fund. "Live sports is the one thing people want to watch on large-screen TVs with friends."
But what particularly attracts investors to Disney is its ability to push unique, iconic content out to growing global audiences through broadcasting or over the Internet, including to new mobile devices, such as the iPad. "Content will be king," says Jordan Opportunity Fund's Jerry Jordan, "and global content providers such as Disney will extract a pound of flesh" for their products and services. In December 2010, the Burbank, Cal., company announced a 14% hike in its annual dividend, to 40 cents a share, a sign of confidence in the future.
If you can identify a company with a robust business model and compelling economics, you're on to a good thing. Consider the case of MasterCard (MA), which along with Visa operates in a global near-duopoly for the processing of credit and debit transactions. Like a toll collector, MasterCard extracts a percentage of each electronic payment. Unlike the bank that issues the card, MasterCard assumes no credit risk. Of course, it can suffer if the number of transactions declines.
Growth comes from the inexorable shift from cash to electronic transactions around the globe. The U.S. market is relatively mature, but the rest of the world, including Europe, is fast catching up. MasterCard, headquartered in Purchase, N.Y., generates 65% of its revenues overseas, where sales jumped 15% in the first nine months of 2010. Visa and MasterCard benefit from the network effect: The more cards they have outstanding, and the more merchants and financial institutions in their global-payments networks, the more difficult it is for newcomers to break into the business. The results show in MasterCard's financials: an eye-popping 53% operating profit margin and a towering 35% return on equity (a measure of profitability).
Editor's note: Since the original publication of this story, MasterCard's stock took a hit from the rising threat of tighter government regulation of debit interchange fees. Lower fees would be a drag, but we still like the stock due to MasterCard's enormous global growth opportunities and rapid expansion.
Despite feeble economic recoveries in the U.S. and the rest of the developed world, demand for oil has perked up, and the price of crude has rebounded to about $85 a barrel. Credit the insatiable thirst for oil from emerging markets such as China, where annual car sales have multiplied tenfold in 15 years and eclipsed those of the U.S. That's why the future looks bright for Schlumberger (SLB), a maker of drilling and well-testing equipment and the world leader in oilfield services.
Oil is getting harder to find and more expensive to develop. The International Energy Agency says that half of the oil production that will be needed by the end of the next decade has yet to be developed or found. New sources will come from such hard-to-tap places as deeper offshore waters and more-remote fields. Harding Loevner's Baughan says that Schlumberger, with the best technology, the most advanced portfolio of services, and the biggest global presence in the industry, "is in the catbird seat" when it comes to being hired by exploration companies for complex projects.
The Houston-based company generates 85% of its earnings outside North America. Those profits will soar with an increase in exploration. Analysts on average expect Schlumberger's earnings to surge 37% in 2011 and to mount by 17% annualized over the next three to five years.
Best known for its consumer brands such as Post-It Notes and Scotch tape, 3M (MMM) is hard to categorize. The St. Paul, Minn., company is actually a diversified industrial conglomerate that makes more than 50,000 products -- everything from adhesives to drug-delivery systems, touch-screen systems and highway signs.
What the diverse businesses share are a culture of science, product innovation, large libraries of patents -- and high profitability. The company’s operating profit margin of 23% is exceptional for an industrial enterprise and its return on equity is consistently above 25%. Born in 1902, 3M operates in 65 countries and produces two-thirds of revenues abroad, half of that from emerging economies. The balance sheet is solid, with cash in the till exceeding debt outstanding. Steady 3M has paid a dividend every quarter since 1916.