(By Adam Zoll) You wouldn't know it by reading the headlines, but 2012 has been a relatively good year overseas--investmentwise, that is. Despite ongoing worries about Europe's sovereign debt crisis and slowing growth in China, a quick scan of foreign-stock indexes shows decent performances amid all the gloom and a rebound from a dismal 2011, when foreign developed markets lost 12% and emerging markets lost 18%.
Even after a rough past week, the MSCI EAFE Index of developed markets outside the U.S. and Canada was up 8.4% year to date through Nov. 14, while the MSCI Emerging Markets Index had tacked on 7%. , but they're certainly better than one might expect given all the pessimism about the global economy.
Research by Morningstar's equity analyst team suggests that many foreign stocks are now close to fully valued. As Morningstar's global director of equity research, Heather Brilliant, discusses in this video, stocks that rely on revenue primarily from outside North America recently were trading at about 96% of fair value versus 93% for those that rely on revenue primarily from within North America. But even though there might not exactly be a surplus of bargains to be found overseas these days, a screen of foreign stocks reveals more than 20 names tracked by our equity analysts that may appeal to investors looking to scoop up non-U.S. companies selling at deep discounts.
Using Morningstar's Premium Fund Screener, tool we built a simple screen of foreign companies with Morningstar Ratings for stocks of 5 stars. Keep in mind that, for equities, the star rating represents where the stock is currently trading relative to our analysts' fair value estimate, with a margin of safety built in based on the level of uncertainty regarding the estimate. The higher the star rating, the deeper the discount. You can read more about our equity research methodology here.
Premium users can click to see the full screen of 5-star foreign stocks. Below are three of these names.
Rio Tinto (RIO)
Fair Value Estimate: $75 | Nov. 14 Closing Price: $47.57
This British mining giant produces aluminum, coal, copper, diamonds, gold, iron ore, industrial minerals, and uranium, with operations focused in Australia and North America. The company's diversified operation makes it less susceptible to volatility than some single-commodity producers, though iron ore accounted for more than 80% of earnings before interest and taxes last year. As with most mining companies, there are environmental and operating risks here, but the company's diversification, low-cost operations, and strong financial position make it attractive among its peer group. On the downside, a slowing global economy--especially in China, a major consumer of natural resources worldwide--could affect demand.
UTi Worldwide (UTIW)
Fair Value Estimate: $21 | Nov. 14 Closing Price: $13.11
In the fast-growing third-party logistics industry, this British Virgin Islands-based company has more than 350 freight forwarding facilities and 180 contract logistics and distribution centers in nearly 60 countries. The firm has a narrow economic moat, benefiting from the global reach of its network of offices. However, it is vulnerable to cyclical declines in global trade, and currency exposure adds risk, as well. A slowing global economy and pressure on international air and ocean freight operations contributed in part to a drop in the stock's fair value estimate in July, though Morningstar projects improved conditions for the industry in the next few years as airfreight volumes recover.
Fair Value Estimate: $13 | Nov. 14 Closing Price: $8.18
Based in India, this is one of world's largest IT service providers. The firm is poised to continue benefiting from a trend toward offshoring by companies around the world seeking to contain costs. Emerging services, such as infrastructure management and testing contribute, to its appeal. Additional revenue streams include business activities ranging from manufacturing and selling desktop computers and medical equipment to soaps and hydraulics. The company is vulnerable to downturns in IT spending, and the industry is highly competitive and subject to pricing pressure. The company has earned a reputation for transparency and shareholder-friendliness.
Data as of Nov. 15.