Investing In American Depository Receipts: A Close Look At 4 Names

| About: CNOOC Limited (CEO)
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I have long been a fan of foreign stocks, especially when I look at the amount of regulatory hurdles US companies have to contend with as well as the loss of purchasing power of the US Dollar since the creation of the Federal Reserve. Foreign stocks interest me more than foreign bonds or currency because of multiple opportunities for their appreciation. I will limit my picks to American Depository Receipt (ADR) stocks on the NYSE in this article due to their ease of purchasing, stricter listing requirements over other US exchanges, and the relative ease of obtaining analyst information.

I first cull the universe of available ADRs on the NYSE by reviewing the stocks' domiciled countries to determine if the country provides a fertile environment for growth. My criteria are that the country is free-market oriented, rich in raw materials, has strong currencies, and runs consistent trade surpluses.

Regional Analysis

1 - North America - I see no prospects in Canada, Mexico or Central America. These areas are too closely correlated to growth of the US economy so their long-term health is questionable.

2 - South America - Socialist governments control most of this continent. The only interesting countries here are Chile and Uruguay. Unfortunately neither country has companies that trade on the US exchanges.

3 - Africa - South Africa has significant reserves of raw materials, but their socialist government with their pro-labor policies is destroying the miners here. A good example is Gold Fields (NYSE:GFI) and its recent spinoff of Sibanye Gold (NYSEMKT:SBI). I will stay away until I see significant improvement in government policies, but this may only come after they have dismantled and nationalized all the profitable companies.

4 - Europe - I separate Europe between the countries locked into the Euro zone and the ones that were smart enough not to get entangled in it (Norway, Switzerland, and United Kingdom).

4.1 - The Euro zone is being carried by the Germans and until the fiscally irresponsible countries of Italy, Greece, Cyprus, and Spain are reined in, the growth prospects will be minimal. I stay away from companies in the Euro zone.

4.2 - The UK is in the midst of a financial crisis with the pound hitting new 52 week lows against the dollar on a regular basis. In pound terms the British are also paying the most they ever have for gasoline. The British central bank will need to raise interest rates to get inflation under control at the cost of causing some short term pain to the economy as the misallocation of capital adjusts itself.

4.3 - Switzerland had been interesting to me but since they have pegged their currency to the Euro they are lumped into a similar situation with the Euro zone. Swiss citizens had enjoyed the opportunity to buy European products with their appreciated Swiss francs, but the Swiss Central Bank soon brought that opportunity to an end (to the gratitude of local Swiss companies who felt competitive pressures from the Euro based rivals).

4.4 - Norway - I like Norway. They are rich in raw materials and have an account surplus. Their currency, the kroner, has also been strengthening against all the major currencies and the Norwegian Central Bank has not yet intervened. Maybe they realize that deflation brings wealth to their citizens and the economy. The only Norwegian company traded as an ADR is Statoil (NYSE:STO).

5 - Asia - The largest continent has an assortment of investment choices, but let me eliminate some countries here to focus on the gems. Russia does not interest me for investment as their government is unpredictable and they have poor infrastructure. Japan is also off the list as their central bank is creating inflation and causing further pain to their already stagnant domestic economy. India suffers from a socialist government and poor infrastructure.

5.1 - China has many interesting investment choices. While centrally controlled, the economy appears more capitalistic than the US with fewer regulations. My favorite is China National Offshore Oil Company (NYSE:CEO).

5.2 - South Korea and Taiwan - These two growing economies are growing and appear to be poised for more growth, but I have not considered any companies domiciled in these countries for investment.

6 - Oceania (Australia and New Zealand) - These two countries are my favorite, but unfortunately many of their ADRs have either moved to the OTC exchange or delisted entirely. They are victims of the high US compliance and regulatory costs associated with Sarbanes-Oxley as well as the subsequent costs of Dodd-Frank. Some examples of this are New Zealand Telecom (NZT) and Australia New Zealand Bank (ANZ).

My current favorites are BHP Billiton (NYSE:BHP) and Westpac Banking (NYSE:WBK).

Stock Analysis

Let's look at each of the stocks mentioned above in more detail.

1 - Statoil - Major integrated oil and gas company with exposure in both Norway and internationally. At a current price of $24.50, the stock is closer to its 52 week low of $22.00 than its high of $28.41. The company has a current PE of 6.48 and a forward PE of 7.83. In addition, its dividend payout is 3.70% (paid annually in May). STO has not declared a dividend for 2013. These attributes alone make it worthy of consideration, but adding in the currency exposure to the kroner (1 ADR = 1 Ordinary Share) as well as the appreciation of North Sea Brent Crude, the company looks even more appealing.

2 - CNOOC Ltd. - China's largest offshore producer of oil and natural gas with ordinary shares listed on the Hong Kong exchange (1 ADR = 100 Ordinary Shares). Although the shares are priced in Hong Kong dollars with a fixed peg to the US Dollar, I see increasing pressure on Hong Kong to either relax the peg or tie their currency to the appreciating Chinese Yuan.

CNOOC has recently received approval for the acquisition of Canadian oil company Nexen (NXY) and they cut their bi-annual dividend last year as a result. The Chinese government controls the majority of the float so the downside risk should be minimal.

At the current price of $188.00, the stock is closer to its 52 week low of $171.58 than to its high of $226.77. CEO has a PE of 8.44, a forward PE of 8.19, and a dividend yield of 1.80%. The dividend is paid bi-annually in May and September. The yield was impacted by the dividend cut in September 2012, but I believe the previous dividend will be restored and raised as the Nexen acquisition is integrated into the company. In addition, government intervention to relax the peg to the US Dollar will increase the underlying value of the ADRs.

3 - BHP Billiton - An international diversified natural resources company domiciled in Australia. This company provides exposure to several opportunities. One is the appreciation of their underlying natural resource reserves of oil and natural gas, aluminum, copper, silver, lead, zinc, molybdenum, uranium, gold, and diamonds. The second is the appreciation of the Australian dollar. This appreciation reflects not only the natural resource reserves of Australia, but the sound fiscal policies of the Australian government. While still leaning socialist, the Australian government has kept a reign on their entitlement programs. Recent mining legislation seems to have had little impact on their miners to date.

At the current price of $73.00, the stock is closer to its 52 week high of $80.54 than to its low of $59.87. BHP has a PE of 20.28, a forward PE of 15.62, and a dividend yield of 3.10%. The dividend is paid bi-annually in March and September. At the current price I would stay away from BHP, but keep it on the radar for a purchase when it experiences a pullback and comes into a more reasonable valuation.

4 - Westpac Banking - The only financial on my list, Westpac provides banking and financial services mainly in Australia and New Zealand. The lack of financial exposure to the US is a key to my selection.

At the current price of $160.24, the stock is closer to its 52 week high of $163.36 than to its low of $97.25. WBK has a PE of 16.42, a forward PE of 13.95, and a dividend yield of 5.40%. The dividend is paid bi-annually in May and November. Australian banks are highly capitalized, unlike their American counterparts so this would be a safer bank to deal with than most. The stock does have a few drawbacks. One is the stock is the thinnest traded of my selections with a daily average volume of a little over 22,000 shares. Another is that this lack of volume and high compliance costs could result in Westpac being another compliance and regulatory casualty and delisting from the NYSE.

Investment Strategy

An investor could create a diversified portfolio purchasing all 4 of these or limit it to one or two. My personal preference would be to buy an equal allotment of the three (waiting on a pullback from BHP). Once the price of BHP becomes reasonable I would reallocate to equal amounts in each of the 4. If WBK does delist or moves to the OTC, I would sell due to the thin volume as well as the difficulty in trading pink sheet stocks.

Disclosure: I am long CEO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.