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8 Foreign Stock Picks For 2012

This is the accompaniment to my previous article, here. As I said in that article, I expect the bipolar behavior of the market to continue into 2012, or at least the first half of it. Volatility from sovereign credit problems and macroeconomic headlines remains a major concern. But ignoring the daily gyrations and focusing on the longer term and staying well diversified are the proper actions by investors.

The greatest potential for gains often come from beaten down and underperforming sectors. In these ADR picks I have combined stocks from sectors with low correlations to balance out the overall beta. However, I was also mindful of the goal of market-beating returns. Moreover, I consider all of these stocks great holdings for the long term as well.

Please note that U.S. investors should hold most foreign dividend stocks in regular taxable accounts, not tax deferred accounts such as IRAs or 401-Ks. The reason is most foreign ADRs have a dividend tax withholding, which can be recovered on your tax return as foreign tax paid. However, this withholding is not recoverable in tax deferred accounts.

8 Foreign Stock Picks For 2012

Data as of close, year end 2011

Symbol

Name

$ Price

P/E

(TTM)

% Yield

(TTM)

Potency

Score

BBL

BHP Billiton

58.39

6.88

3.46

29.99

NVS

Novartis

57.17

13.47

4.12

26.94

ACN

Accenture plc

53.23

16.31

2.54

27.55

VALE

Vale

21.45

3.41

8.05

18.25

BIDU

Baidu, Inc.

116.47

52.87

n/a

n/a

RCI

Rogers Communications

38.51

13.87

3.57

19.89

PBR

Petrobras

24.85

5.93

5.00

21.05

OTCPK:NSRGY

Nestle

57.71

5.30

3.61

13.60

-

The Withholding Tax Rates

Please note that the U.S. has special tax treaties with some countries that provide more favorable treatment of dividends earned by U.S. investors. The actual rate could be less than the rates listed.

Australia

30% (See note [1])

Brazil

15%

Canada

15% (See note [2])

China

0% (See note [3])

Ireland

20%

Switzerland

35%

-

[1] Although BHP Billiton (BHP) is primarily an Australian company, it is separately listed in the U.K. under the BBL symbol. The U.K. does not have a withholding tax.

[2] But no withholding for U.S. tax payers if held in a tax deferred account.

[3] No tax for Red Chips, like BIDU, but 10% for A, B, and C Shares.

I should also point out that I would not recommend buying a full position in any of these stocks in a single purchase. Instead, I would build a position in two, three, or even four portions as European sovereign credit and domestic banking and real estate news headlines are bound to whipsaw the market and create buying opportunities.

1. BHP Billiton plc (BBL)

BHP Billiton is a global diversified natural resources company headquartered in Melbourne, Australia and with a management office in London, UK. It is the world's largest mining company by revenue.

BHP has been actively searching for acquisitions and diversifying outside of hard commodities. After dropping its $66 billion takeover bid for rival Rio Tinto (RIO) in November 2008, BHP bought Athabasca Potash for $320 million in January 2010. In August of that year, BHP made a $40 billion hostile takeover bid for Potash Corporation of Saskatchewan (POT). The Canadian government opposed the takeover and BHP withdrew its bid in November 2010. Then in July 2011, BHP significantly expanded its shale natural gas holdings by acquiring the U.S. company, Petrohawk Energy for $12.1 billion in cash. In addition, I speculate there is a possibility that BHP could make a bid for Freeport McMoRan (FCX).

In its 2011 fiscal year ending June 30, BHP reported revenues of $71.7 billion vs. $52.8 billion for 2010, an increase of 35.9%. Its profits were $23.6 billion vs. $12.7 billion in 2010, an increase of 85.9%. Its net operating cash flow was $30.1 billion vs. $16.9 billion, an increase of 78.1%. Net earnings per share was $3.93 vs. $2.24, an increase of 75.6%. All fantastic numbers.

BHP has a debt to equity ratio of 0.25 and a price to book value of 2.77, which is 31% below its 5-year average. BHP's price has already come down substantially and even if China's and the global economy weaken further, at 6.84 times earnings its downside risk is limited. But its upside potential is significant, and with a 3.46% dividend yield it will be paying us until commodity demand picks up again.

2. Novartis International (NVS)

Novartis is a multinational pharmaceutical company based in Basel, Switzerland. Novartis produces pharmaceutical drugs for a broad range of conditions, including Parkinson's disease, Alzheimer's, cancer, epilepsy, cystic fibrosis, hypertension, AD/HD, and depression. It also has a substantial line of over the counter consumer health products, including well known brands such as: Bufferin, Desenex, Excedrin, Gas-X, Maalox, No-doz, Theraflu, and Triaminic.

Novartis has a robust portfolio of generic drugs and a promising pipeline, which gives it an advantage over its competitors. In January 2010, Novartis offered to pay $39.3 billion to acquire the remaining 75% of Alcon (ACL) it didn't already own. The other 25% it had bought in 2008. Alcon is the world's largest eye-care company.

In September 2010, Novartis's Gilenya became the first orally taken drug for multiple sclerosis to be approved by the U.S. Food and Drug Administration. The drug reduces relapses and slows progression of disability in patients with relapsing forms of the disease. It also received approval from Health Canada and the European Union in early 2011. The MS drug market is a multi-billion dollar market.

Novartis has diversified into the four major business segments: pharmaceuticals, generic drugs, biotechnology, and over the counter consumer health products. This gives it flexibility and a more steady revenue stream in volatile markets. It pays a reliable 4.12% dividend and has a healthy growth. It has been knocked down by the European credit crisis, but I believe it will rebound and reward shareholders.

3. Accenture plc (ACN)

Accenture plc is a global management consulting, technology services, and outsourcing company. It is the largest consulting firm in the world and is headquartered in Dublin, Ireland.

IT budgets are expected to remain mostly flat to a small increase in 2012. With all the financial and political uncertainties around the world, most companies have been careful about spending on anything but the most essential needs. So IT spending has suffered. Instead of upgrading their IT equipment and boosting their IT departments to meet their needs, companies have increasingly resorted to outsourcing and off-shoring. This has been a growing trend and Accenture is well positioned to benefit greatly from this trend.

In its most recent 10-Q form for the quarter ending November 30, 2011 Accenture reported total net revenues of $7.1 billion vs. $6.0 billion for the same period 2010, for an increase of 17%. Earnings per diluted share was $0.96 vs. $0.81 for an increase of 18.5%.

4. Vale (VALE)

Vale is a Brazilian diversified mining company. It is the second largest mining company in the world, the largest producer of iron ore, and second largest producer of nickel. Vale also produces other metals, including, manganese, copper, bauxite, potash, kaolin, alumina, and aluminum.

Vale is also engaged in the generation of hydroelectric power and currently participates in the operation of eight hydroelectric plants, with an average 45% ownership in each. Furthermore, Vale owns substantial logistics operations with over 800 locomotives and 35,000 freight cars, although it has indicated its intention in reducing these holdings. Vale also operates hydroelectric plants in Canada and two more in Indonesia.

In its most recent earnings report, for the nine months ending September 30, 2011 Vale reported operating revenues of $45.6 billion vs. $31.2 billion for the same period 2010 for an increase of 45.9%. Its net earnings were $18.2 billion vs. $11.3 billion for the same period 2010 for an increase of 60.5%.

As I mentioned, mining companies like Vale and BHP Billiton will have a bumpy road ahead in the short term. The global economy and particularly China's economy are expected to cool somewhat, and with China being the largest consumer of mining products, that doesn't bode well for miners. Additionally, Vale like Petrobras is susceptible to Brazil's government interference. But with a forward P/E ratio of 5.2 Vale's valuation is compelling and I believe its downside risk is limited while the upside is substantial.

5. Baidu, Inc. (BIDU)

Baidu is a Chinese web services company headquartered in Beijing, People's Republic of China. Baidu provides many services to locate information, products, and services on the Internet with its Chinese language search engine. It also offers a host of other services, including Japanese language search, search for audio and image files, Baidu Map, Baidu Space (its social networking site), Baidu Encyclopedia, etc.

China’s Internet users have grown to approximately 440 million, almost one and a half times the entire population of the U.S. The huge user base has made Baidu one of the fastest growing Internet companies in the world.

For its third quarter 2011 Baidu reported total revenues of $654 million, an 85.1% increase from the corresponding period in 2010. Its operating profit was $349 million, an 88.5% increase. Its net income attributable to Baidu was $295 million, a 79.8% increase. These are astonishing results, considering quarter after quarter it produces double digit growth.

Going by the P/E ratio metric, at a trailing P/E of over 50 Baidu is an expensive stock, but considering its growth it may not be so. Unlike most Chinese companies, which are exports focused and rely on the global economy for growth, Baidu is primarily a domestic growth story. I believe Baidu will do very well in the next few years.

6. Rogers Communications, Inc. (RCI)

Rogers Communications is one of Canada's leading communications companies, headquartered in Toronto, Ontario. It is the largest cable television provider in Canada, offering cable TV, high-speed Internet, residential telephony services, and video retailing.

One of its subdivisions, Rogers Wireless, is Canada's largest voice and data communications services provider. Rogers Media is Canada's premier collection of media assets with businesses in radio and television broadcasting, TV shopping channels, publishing, and sports entertainment. Rogers Business Solutions division is a national provider of voice communications services, data networking, and broadband Internet connectivity to businesses of all sizes.

In its most recent earnings report for the quarter ending September 30, 2011, Rogers reported operating revenues of $3,149 million vs. $3,111 million, an increase of 1.2%. Its operating profit was $1,222 million vs. $1,165 million, an increase of 4.9% from the corresponding period in 2010. Its net income was $491 million vs. $380 million, an increase of 29.2%, and its diluted earnings per share was $0.87 vs. $0.66, an increase of 31.8% from the corresponding period in 2010.

Rogers Communications is the dominant telecommunications company in Canada with broad reach and vastly diverse businesses. As the economy begins to improve, Rogers profits will improve. Additionally, with Canada's immigrant population growing, the need for communications services will grow and Rogers will be a big beneficiary.

7. Petrobras (PBR)

Petroleo Brasileiro, better known as Petrobras, is a partially state-owned Brazilian multinational energy company headquartered in Rio de Janeiro, Brazil. It is the largest company in Latin America by revenue and by market capitalization.

In its most recent earnings report for the nine months ending September 30, 2011 Petrobras reported net operating revenues of $109.8 billion vs. $88.1 billion, an increase of 24.7% from the corresponding period in 2010. Its net income attributable to Petrobras was $17.0 billion vs. $13.3 billion, an increase of 28.2%.

With longer term unstoppable economic growth around the world particularly Asia, the demand for oil is unlikely to contract for long. Additionally, oil exploration has become harder and more costly. Petrobras has made huge discoveries of deep water offshore oil reserves in the last few years, and is among a small number of producers with reserves growth.

Petrobras’s share price has been crushed from its 52 week high of $42.75 to year-end close of $24.63, a staggering 42% drop. For 2011 the stock is down 34% while all of its competitors are up; for instance, Exxon Mobil (XOM) is up 18.7%. The main reason has been investor’s fear of Brazilian government intervention in its business. Some government policies have been detrimental to Petrobras, such as preventing gasoline price increases in Brazil last spring while oil prices moved up sharply. But I believe these fears are overblown and the stock price is spring loaded for any sign of government's more favorable policies.

8. Nestle (OTCPK:NSRGY)

Nestle is the world's largest food and nutrition company and is headquartered in the town of Vevey, Switzerland. Its massive portfolio of consumer products includes thousands of well known brands, such as, Butterfinger candy, Carnation, Purina, Fancy Feast, Gerber baby food, Häagen-Dazs, Jenny Craig, Lean Cuisine, Nescafé, Perrier, PowerBar, etc.

In its most recent earnings report for the nine months ending September 2011, Nestle reported total revenues from continuing operation of CHF 60.9 billion (Swiss francs) for a 7.3% organic growth compared to prior year. In the press release Paul Bulcke, Nestle CEO said, "In a tough environment, we continued to build our capabilities and positions for the future while maintaining strong growth across regions and categories... For the year as a whole, in spite of input cost pressures, we expect to slightly over-perform against our long-term organic growth range of 5-6% and continue to strive for a margin improvement in constant currencies".

With threat of austerity measures around the world, particularly in Europe, Nestle is a steady-earner, global business that is virtually recession proof. At its year-end trailing P/E ratio of 5.30, the stock is cheap, and with its 3.61% dividend and five-year dividend growth rate of 15.5% Nestle is an attractive stock to tame volatility in a portfolio and for steady growth in the long term.

Source: 8 Foreign Stock Picks For 2012

Additional disclosure: I may initiate a long position in one or more of the stocks discussed over the next 72 hours.