By Larry D. Spears
"Globalization" has become one of the top financial buzzwords in recent years -- and with good reason. The economies of many developing-market countries have achieved an important critical mass, meaning they're now growing a lot faster than much more "mature" counterparts like the United States, Europe and Japan.
The upshot: Investors who ignore these opportunities in favor of a "U.S. only" investment regimen face a future marked by lackluster returns.
In fact, the U.S. stock market ranked just 42nd in the world in terms of performance in 2010, despite posting a 12.78% return that was well above its historical average, according to results compiled by Bespoke Investment Group. Germany did a little better, leading the G-7 nations with a 16.06% return, but Great Britain managed just 9.00%. Japanese-stock-market investors suffered a loss of 3.01%, while those in Greece endured a 35.62% freefall.
By contrast, many of the smaller Asian markets -- particularly those of countries whose products and resources are helping fuel China's burgeoning economic growth -- ranked at or near the top of the list. So did some of the markets in the former Soviet republics and in South America. Specifically, the top five performing markets in 2010 were Sri Lanka (96.01%), Bangladesh (82.79%), Estonia (72.62%), Ukraine (70.20%) and Peru (64.99%).
Of course, the point here isn't to rank global markets by performance. Rather, it's to demonstrate the clear necessity for savvy investors to participate in multiple markets if they hope to achieve the best-possible returns from the money that they've invested in stocks.
Reaping the Rewards, Dodging the Risks
The advantages of "going global" are obvious: Access to foreign opportunities not available in the U.S. market, diversification away from slow or lagging economies, exposure to currencies other than the U.S. dollar and, as illustrated above, increased chances for outstanding returns.
Sadly, however, the dangers are equally apparent, and include:
- The impact of adverse currency fluctuations.
- The risk of foreign inflation.
- The lack of investor protections that result from the lax regulatory controls prevalent in so many overseas markets.
- Questionable economic policies.
Getting accurate or reliable information to use in analyzing foreign stocks can also be a problem. And, as Egypt has demonstrated, political and civil unrest can turn everything upside down: Egypt's market gained 15.71% in 2010, but the recent turmoil there will likely translate to significant losses in 2011.
So how can you capture the benefits of global investing without shouldering all of the risks by yourself? One of the best -- and most efficient -- global investing tricks is to let major U.S.-based corporations take a major portion of the risks for you. And you do that by searching out U.S.-based companies with high percentages of foreign revenue.
What's an "American" Company?
Although many investors fail to realize it, the list of "purely American" corporations is shrinking rapidly. In fact, in 2009 (the last year for which full financial numbers are available), barely a third of the companies that make up the Standard & Poor's 500 Index generated 90% or more of their revenue inside the United States, while more than a quarter of them derived over half their sales from foreign markets.
Specifically, Bespoke estimates that the average S&P 500 company now gets 29.6% of its revenue from international sources, and a recent Reuters story quoted Bank of America-Merrill Lynch (NYSE:BAC) analysts as stating that the average foreign revenue is as high as 45% when sales of suppliers are included.
Standard & Poor's estimates that foreign revenue accounts for an average of 46.6% of overall revenue for companies in the S&P index. In dollar terms, that works out to an aggregate $7.99 trillion. That's down from the peak of $9.08 trillion in 2008, but is nearly double the levels of only a decade ago. And those are just averages; some U.S. companies have far higher levels of foreign revenue. For instance:
- McDonald's Corp. (NYSE:MCD), for example, had $22.7 billion in revenue in 2009, but only $7.9 billion came from the United States, while Europe generated $9.3 billion and the Asia-Pacific region brought in $4.3 billion -- though growth there was much higher than in the rest of the world, reflecting Mickey D's ongoing expansion campaign in China.
- Yum Brands Inc. (NYSE:YUM), the parent company of KFC, Pizza Hut, Taco Bell and several other fast-food and restaurant chains, reported similar numbers, with just over 50% of its $10.8 billion in 2009 revenue coming from foreign markets. China accounted for most of the company's growth, led by the highly popular KFC outlets (In the U.S. market, by contrast, Yum's same-store sales fell in 2009, reflecting the slumping economy).
Some of the other major U.S.-based companies with significant overseas revenue include:
- Texas Instruments Inc. (NASDAQ:TXN), which despite its name gets 89% of its revenue from overseas.
- Merck & Co. Inc. (NYSE:MRK), which gets more than 50% of its revenue from Europe.
- The Coca-Cola Co. (NYSE:KO), which derives sales from more than 200 different countries.
- Tobacco-giant Altria Group Inc. (NYSE:MO), whose increased foreign sales have more than made up for the U.S. revenue lost to "no-smoking" campaigns.
- Colgate-Palmolive Co. (NYSE:CL), which got 82% of 2009 sales from abroad, including 45% from emerging markets, where middle-class consumer populations are soaring in size (and where the company's toothpaste products hold an amazing 44.4% global market share.)
One more example, just to illustrate the rate of growth, is engine maker Cummins Inc. (NYSE:CMI), which just reported 2010 revenue of $13.23 billion, 64% of which was international in nature. That's up from just 40% in 2000, and was fueled by 37% sales growth in India and 70% increases in both China and Brazil.
I could keep listing individual corporate examples as long as I have the energy to type, but you get the idea. What's more, this kind of almost-hidden international exposure can be found in nearly every industry group and market sector -- led by U.S. technology companies, which got an average of 53.8% of their 2009 direct revenue from overseas sales.
Five Stocks to Consider Now
Other sector leaders, as ranked by Bespoke based on 2009 averages, are basic materials (41.6%), consumer staples (33.1%), industrial products (32.4%), energy (30.9%) and healthcare (30.4%). The only real laggards in terms of international revenue are the telecommunications companies (1.9% foreign sales) and utilities (3.7%) which, by their nature, serve primarily local markets.
If you want to broaden your international portfolio exposure with mainstream picks, the stocks of any of the companies already listed would do the trick, but the foreign potential of those companies is hardly a secret.
To get a better bang for your buck, your best choices will be lesser-known U.S. companies that are just launching, or that are still expanding, their foreign-marketing efforts. That's particularly true of companies with a growing focus on China, which should continue to lead the global economic resurgence for years to come.
By that definition, five candidates that merit a close look are:
- NVIDIA Corp. (NASDAQ:NVDA), recent price $22.82: NVIDIA is the only public company that focuses exclusively on graphics chips. Its visual-computing technologies are used to generate graphics on workstations, personal computers, game consoles (including the Sony Corp. (NYSE:SNE) PlayStation 3) and mobile devices. NVIDIA serves the entertainment and consumer market, professional designers, computer makers and manufacturers of mobile phones and other portable devices. NVDIA gets 39% of its revenue from China -- second only to Advanced Micro Devices Inc. (NASDAQ:AMD) in percentage terms -- with another 22% coming from other foreign markets. The company had $3.32 billion in revenue in 2010 and posted a loss of 12 cents per share for the full year. However, it is trending upward, and reported a 15-cent per share fourth-quarter profit.
- Cliffs Natural Resources Inc. (NYSE:CLF), recent price $87.52: An international mining and natural resources company, Cliffs produces coal and iron ore pellets from eight mines in North America. But its real appeal comes from its role as a supplier and direct shipper of coal and iron ore from Australia into the Asia-Pacific region. It has two iron-mining complexes in Western Australia, which lets it serve the Asian markets with direct-shipping of lump ore, as well as a 45% economic interest in a coking and thermal-coal mine located in Queensland. It derived slightly more than 30% of its $2.34 billion in 2009 revenue from China, and an additional 5.1% from other Asian markets, and earned $1.63 per share. Revenue climbed in the first three quarters of 2010, with second- and third-quarter earnings hitting $2.42 and $2.18 a share, respectively. The stock pays a 56-cent dividend, yielding 0.62%.
- Leggett & Platt Inc. (NYSE:LEG), recent price $23.02: Founded in 1883 in Carthage, Mo., Leggett & Platt has grown into an international designer and manufacturer of a wide range of products for homes, offices, retail stores and automobiles. Its diverse product list includes grocery display racks, appliance parts, power seats for cars and docking stations for computers. The company had $3.36 billion in revenue in 2010, earning $1.16 a share, up from 74 cents in 2009. Leggett got 22.3% of its sales from international markets, including 8.1% from China, with sales driven by the growing tide of consumerism there. The stock has a dividend of $1.08 a share, yielding 4.76%.
- PerkinElmer Inc. (NYSE:PKI), recent price $26.91: Perkin operates in two divisions -- human health and environmental health -- and provides technology and consulting services to the medical diagnostics, medical research, environmental, safety-and-security and laboratory-services markets. It has operations in 150 countries in the Americas, Europe, Asia and Africa. Most importantly, the company generated more than $125 million of its $1.8 billion in 2010 revenue from China, up from just $46 million in 2006. And there's more to come, thanks to Beijing's new national healthcare program. The company also has a growing presence in India, with two production facilities located there. The dividend of 28 cents yields 1.08%.
- Air Products and Chemicals Inc. (NYSE:APD), recent price $88.61: Founded in 1940, APD is the world's largest supplier of hydrogen and helium products, as well as other gases used in industry, tech manufacturing, energy services and healthcare. The company operates in more than 40 countries and got more than 60% of its trailing 12-month revenue of $9.02 billion from international markets, including roughly 7% from China, where rising commercial demand is expected to foster increasing sales growth. Earnings were $4.74 a share for the 12 months that ended Sept. 30, and the dividend of $1.96 gives the stock a yield of 2.21%.
All of these stocks are trading at or near their 52-week highs, but so is the overall market, so don't let that stand in the way of this global investing strategy.
However, keep in mind fluctuations in the value of the dollar can greatly affect your actual returns. A weaker dollar will typically boost the stock prices of companies with large international exposure, but if the dollar starts moving higher, consider shifting some of your assets into companies with the bulk of revenue generated domestically.
If you'd rather let a pro worry about monitoring currency trends and shifting in and out of companies at risk when the U.S. dollar rises or falls, there are several ETFs weighted heavily toward companies with significant overseas revenues. Two worth a look are:
- PowerShares Dynamic Food & Beverage (NYSEARCA:PBJ), recent price $17.99: This fund attempts to track the Dynamic Food & Beverage Intellidex, a 30-stock index of U.S.-based food and drink companies, nearly all of which have sizable international revenue. Based on recent weightings, the fund allocates 16% of its assets to McDonald's, Starbucks (NASDAQ:SBUX) and Yum Brands. (Author's note: As a stock analyst, I can't offer any guarantees here, but as a food expert, it would seem hard to go wrong with a little PB&J!)
- Vanguard Consumer Discretionary Fund (NYSEARCA:VCR), recent price $61.19: This fund mirrors the Morgan Stanley Capital International United States Investable Market Consumer Discretionary Index, which tracks a mix of small, medium and large U.S. companies that make and sell discretionary consumer goods, such as automotive products, appliances, apparel and leisure equipment -- all the things new shoppers in emerging markets want to buy. The index also includes hotel and restaurant chains, media services, leisure facilities and other types of retailers. McDonald's is the fund's largest holding, and it pays a dividend of 60 cents a share, providing a yield of just under 1.00%.