Markets & Finance

Capturing Diversity Overseas with ADRs


From Standard & Poor's Equity Research

Investment diversification is just as important abroad as it is at home, but finding foreign stocks that trade in the U.S. can be difficult.

Standard & Poor's recommends investors take a look at Germany's Allianz (AZ

; ranked 4 STARS, buy), BASF (BF

; 4 STARS, buy), Bayer (BAY

; 5 STARS, strong buy), and SAP (SAP

; 5 STARS, strong buy); Switzerland's Novartis (NVS

; 5 STARS, strong buy); France's Total (TOT

; 5 STARS, strong buy); and England's Barclay's (BCS

; 4 STARS, buy). All of these companies are traded on the New York Stock Exchange as American Depositary Receipts or Shares and are ranked buy or strong buy by S&P equity analysts.

"Given that we believe a quality rotation is under way in equity markets globally, we expect Europe and the U.K. to outperform through yearend," says Alec Young, equity market strategist at S&P. In S&P's view, weakness in the U.S. dollar vs. the euro should bolster returns in the European equities. Many of the stocks boast high dividends—the S&P Europe 350 index yields 3.2%, for example—and they have low valuations by historic standards.

Young says the aforementioned stocks "are easily actionable for U.S. investors seeking large capitalization and liquid international equity exposure."

PRINTER POTENTIAL. S&P also has strong buy rankings on Japan's Canon (CAJ) and Matsushita (MC). "While we believe Japan will not likely outperform other asset classes through yearend, some exposure is warranted," Young says. Canon and Matsushita "are poised to outpace the overall MSCI Japan Index."

Canon, the camera and copier maker, should see profits benefit from ink-jet printers, which have not reached their full potential in the U.S., as new models capture market share.

S&P thinks Matsushita, which makes electric and electronic products, will take a leading position in the plasma display TV market throughout fiscal 2007 (ending March) and fiscal 2008. The company expects sales of these TVs to outpace those of liquid crystal display TVs and make up 25% of production by the end of 2007.

CONSOLIDATION GAINS. Among the European stocks, S&P believes Allianz, a financial services provider, is benefiting from closer integration of its consolidated operations. While the group remains subject to the volatility of credit and insurance claims costs, the company has improved its overhead cost ratios and appears to have better control of risks.

Barclay's, another financial services company, should post a 23% increase in revenue for 2006, after insurance claims, and a 31% rise in profit, driven by the consolidation of the South African ABSA subsidiary and the expected gain of more than $462 million on the sale of First Caribbean Associate, a banking affiliate.

For the chemicals company BASF, S&P expects operating profit to increase about 31% in 2006, with a forecast for significant growth in the oil-and-gas segment due to higher average oil prices and the expansion of natural gas production and trading activities.

IMPROVING ENVIRONMENT. Bayer, a chemicals and pharmaceuticals company well known for its name-brand aspirin, carries a strong buy ranking based on total return potential. S&P believes the shares are undervalued. The acquisition of Schering strengthened the company's health-care business, and S&P believes that the planned divestiture of Bayer's diagnostics division is positive, as it will allow the company to focus on pharmaceuticals and consumer health products. Bayer plans to use the proceeds to repay debt.

The software company SAP should benefit from what S&P expects to be a moderate, but improving, spending environment for enterprise software, although S&P expects the company to post above-average growth.

S&P also has a strong buy recommendation on the integrated oil company Total, which has a strong exploration and development portfolio and a restructured refining and marketing segment. S&P expects the company's production to solidly increase through 2010.


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