Markets & Finance

Stocks: Sifting for the Best ADRs


S&P's latest stock screen finds seven foreign names with its highest investment and fair-value ratings

From Standard & Poor's Equity ResearchFinancial pros frequently advise investors to maintain exposure to international stocks in their portfolios (at Standard & Poor's, our current recommendation is that investors maintain 20% of their portfolios in non-U.S. equities). One way U.S. stock players can put their money in individual foreign equities is through American depositary receipts (ADRs). These are receipts held by a U.S. bank that represent stock in a foreign company. ADRs trade in U.S. dollars, making it simpler for stateside investors to put their money in non-U.S. shares.

Gaining international exposure through a U.S.-listed and -traded vehicle sounds nice, but as always, it pays to be selective. For this week's screen, we weren't looking for just any foreign stock. We were looking for the best—those with solid fundamentals and appealing valuations.

We first screened for ADRs that were ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P's equity analysts. Stocks with those designations are expected by S&P analysts to outperform the S&P 500 index (on a total return basis) over the coming 12 months, with the shares rising in price on an absolute basis.

Good Track Records

Next, we tapped S&P's Fair Value Model, a proprietary quantitative stock ranking system. The model calculates a stock's weekly fair value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, price-to-book value, return on equity, and current yield relative to the S&P 500. Stocks are ranked from 5, indicating significant undervaluation, to 1, indicating significant overvaluation. We sifted for those issues ranked 4 or 5 under the model.

We then took a final step to ensure that the ADRs on our list had good track records: We narrowed the roster by searching for ADRs whose historical five-year sales and EPS growth rates were at least 15%.

The following seven names popped up when our screen was finished.

Company

S&P STARS Rank

S&P Fair Value Rank

Business Objects (BOBJ)

4

5

CNOOC (CEO)

5

4

Icon PLC (ICLR)

5

4

Logitech International (LOGI)

4

4

NDS Group (NNDS)

5

5

NICE-Systems (NICE)

5

5

Teva Pharmaceutical (TEVA)

4

5

Kaye, a chartered financial analyst, is an analyst for Standard Poor's Portfolio Services. He is the author of The Standard Poor's Guide to the Perfect Portfolio: Five Steps to Allocate Your Assets and Ensure a Lifetime of Wealth.

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