U.S. markets are looking mighty expensive these days, but there are still plenty of investing opportunities available out there especially in international stocks.
In July, the S&P 500 Index booked its sixth straight month of gains. The index that tracks the performance of 500 of the largest companies listed on U.S. stock exchanges is now up 18% year-to-date and trading in record-high territory. In contrast, the MSCI All Country World Index, excluding the U.S., is up 5.3% over the same period.
International stocks have lagged for a variety of reasons, including delta variant headwinds and reopening concerns, as well as a recent drubbing in Chinese stocks as the government tightened regulations on tech and private-tutoring companies.
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However, this outperformance in the S&P 500 now has BofA's sell-side indicator pointing to a lot of optimism in U.S. stocks so much, in fact, that it's nearing a ma! rket “sell” signal. The indicator is at the closest it has come to a “sell” signal since May 2007, during the financial crisis. “We have found Wall Street's bullishness on stocks to be a reliable contrarian indicator,” says Savita Subramanian, equity and quant strategist at BofA Securities.
With U.S. markets potentially poised for apullback, it seems like an attractive time to search for better values in international stocks.
We screened companies according to estimated earnings per share (EPS) growth over the next two years, low forward price-to-earning (P/E) ratios indicating the shares may be undervalued analyst ratings, and whether they are traded on a major U.S. stock exchange.
Here are seven international stocks that could be solid buy-and-hold investments. With the caveat that Chinese stocks have been volatile lately amid a rash ofgovernmental regulation, we included two high-growth, high-quality stocks from China that nonetheless look attractive over the long run.
Warren Buffett Stocks Ranked: The Berkshire Hathaway PortfolioData is as of Aug. 20. Forward P/E ratios, annual EPS estimates and analyst ratings courtesy of S&P Global Market Intelligence, unless otherwise noted.
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Market value: $184.3 billionCountry: U.K.Forward P/E ratio: 20.7Estimated annual EPS growth over two years: 29.1%Analysts' ratings: 5 Strong Buy, 0 Buy, 1 Hold, 0 Sell, 0 Strong Sell
By now, the world knows the name AstraZeneca (AZN, $59.39) for its development of a COVID-19 vaccine. Pharmaceutical investors, however, have long known this English company is tops among international stocks thanks to its most popular drugs, including high cholesterol-fighter Crestor and Nexium, which treats acid reflux.
Patents for both of these drugs have expired, with another popular drug Symbicort (asthma) heading that way. AstraZeneca nevertheless is developing “one of the strongest” pi! pelines a! mong pharmaceutical companies with several drugs holding “blockbuster potential,” writes Morningstar analyst Damien Conover in a research note. These include cancer drugs Tagrisso and Imfinzi, as well as treatments for respiratory diseases and diabetes.
“Astra's strong lineup of next-generation drugs should significantly offset sales lost to new generic competition,” Conover says. Moreover, its recently completed $39 billion acquisition of Alexion could “diversify cash flows into the rare disease market, which should help Astra consistently reinvest in research and development, supporting the firm's wide moat,” he adds.
Jefferies analysts say the Alexion acquisition implies the deal is accretive to earnings by 30 cents per share to 40 cents per share, which should “calm some nerves,” according to a recent note.
AstraZeneca also recently reported second-quarter sales that beat Wall Street expectations. However, gross margins weakened likely due to producing a larger supply of its no-profit COVID-19 vaccine, the analysts say.
Jefferies has a Buy rating on the healthcare stock, with a price target of $68.50. Its analysts say the stock is trading at a favorable valuation within the European pharma industry, even with the company's “leading growth profile.” Meanwhile, “a multitude of pipeline catalysts and new launches should aid ongoing momentum,” the analysts say.
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Market value: $38.4 billionCountry: SwitzerlandForward P/E ratio: 22.2Estimated annual EPS growth over two years: 26.3%Analysts'ratings: 5 Strong Buy, 0 Buy, 4 Hold, 0 Sell, 0 Strong Sell
When looking at the best international stocks, it's hard to not mention STMicroelectronics (STM, $42.33). STM is one of the largest chip manufacturers in Europe whose clients include Apple (AAPL), Tesla (TSLA), HP (HPQ), Samsung and Huawei.
Based in Geneva! , the com! pany makes a broad array of chips, from microcontrollers (small computers on a single chip) to more complex sensors used in smartphones and self-driving vehicles. The French and Italian governments own a combined 27.5% of the company.
The chipmaker reported second-quarter earnings that beat Wall Street's consensus expectations and also raised its forecast for full-year sales. In an earnings call with clients, CEO Jean-Marc Chery pointed to “strong demand” amid a continuing chip shortage worldwide that has necessitated “difficult” allocation discussions with clients. The company is raising its manufacturing capacity to meet demand.
BofA Global Research reiterated its Buy rating on STM with a price target of $49, according to a recent note. The report says many of STM's key financial metrics in the second quarter beat expectations: sales, gross margin, earnings before interest and taxes (EBIT) and earnings per share. Division performance also bested expectations across the board. The company also recently launched a three-year share buyback program of up to $1.04 billion.
Canaccord Genuity also has a Buy rating on STM following the upbeat earnings report with a price target of $51. And while Baird analyst Tristan Gerra has a Neutral (Hold) rating on the stock, he notes that STM's 40% gross margin is at a 20-year high. Moreover, the company has booked orders out to 18 months as supply remains constrained.
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Market value: $1.6 billionCountry: ChinaForward P/E ratio: 5.7Estimated annual EPS growth over two years: 18.5%Analysts' ratings: 3 Strong Buy, 1 Buy, 0 Hold, 0 Sell, 0 Strong Sell
FinVolution Group (FINV, $5.78) is a Shanghai-based online lender that offers primarily short-term consumer loans to individuals unserved or underserved by traditional financial institutions.
FinVolution had 130.8 million registered users on its platform at the end of! June. Th! e company also reported 1.2 million new borrowers in the second quarter, a 500.5% increase from the year prior. While its market is mainly in China, the company is expanding overseas in the Philippines, Indonesia and Vietnam. FinVolution makes money by charging transaction service fees.
UBS upgraded the stock to a Buy rating from Neutral, with a price target of $11, revised from $2.10, according to a recent report. Analyst Alex Le notes that the company reported “relatively resilient” earnings despite uncertainties from COVID-19 in 2020. FinVolution also is shifting to serve customers with better credit quality and lower pricing.
Le is bullish on the company's growth prospects as competition eases from major online platforms while industry consolidation continues due to tighter regulations. He says the UBS Evidence Lab shows that FinVolution's PPDai app kept up its growth momentum into the second quarter of 2021 from the prior quarter.
Jefferies also has a Buy rating on FinVolution, with a price target of $9.20 on the international stock. This is still a 60% discount to the internet sector average, according to a recent research note. One reason for this discount is the changing regulatory environment in China for online lending. Other risks include potentially higher marketing costs to acquire new users and macro-environment uncertainties that could raise the delinquency ratio. Nevertheless, the price target represents an implied upside of 59.2% from FINV's current level.
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Market value: $2.1 billionCountry: TaiwanForward P/E ratio: 7.9Estimated annual EPS growth over two years: 141.4%Analysts' ratings: 1 Strong Buy, 2 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Himax Technologies (HIMX, $12.04) is the second semiconductor name featured on this list of international stocks. HIMX is a fabless chipmaker ! meanin! g it designs the chips and contracts out manufacturing and its integrated circuits are used in displays for TVs, laptops, smartphones and other consumer and automotive electronics.
In early August, the Taiwanese company reported second-quarter revenue of $365.3 million, nearly double its results from the year prior. Profits surged to 62.3 cents per ADS versus 1 cent per ADS in Q2 2020 with both revenues and earnings exceeding consensus estimates.
Baird analyst Tristan Gerra describes Himax as a “differentiated” technology company that not only focuses on secular displays but also on emerging consumer technologies such as 3D sensing. This technology enables computers to mimic human vision by providing depth, length and width of objects. Himax is a “leading supplier” of 3D sensing components, he writes in a recent note.
Gerra has an Outperform rating on the stock, which is the equivalent of a Buy, and believes the company should continue to benefit from an environment of strong unit growth for its products in 2022, while product mix and pricing are expected to buoy margins past this year. Moreover, Himax “sees no slowdown in automotive demand momentum,” he says.
“The non-driver business should see a significant inflection point ahead, driven by new products and design wins, which are incremental to the core business' current strong fundamentals,” Gerra adds.
Longer term, he sees Himax positioned well as a key player in the augmented reality market. Among international stocks, this one is poised for strong returns, at least according to Gerra. He has a $20 price target on HIMX, implying expected upside of more than 66%.
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Market value: $65.9 billionCountry: BrazilForward P/E ratio: 4.6%Estimated annual EPS growth over two years: 197.3%Analysts' ratings: 6 Strong Buy, 3 Buy, 5 Hold, 0 Sell, 0 Strong Sell
Petroleo Brasileiro! (PBR, $1! 0.10), or Petrobras, is the state-controlled oil company in Brazil and ranks no. 181 among the world's largest companies in the Fortune Global 500. The largest oil and gas company in Latin America, Petrobras is both an upstream (extraction of raw materials) and downstream (supplying users with petroleum products) energy firm.
Recently, Petrobras reported record second-quarter earnings that beat Street expectations, reversing the year-ago loss due to a rebound in oil prices and strong demand for electricity and natural gas. Revenue also beat analysts' forecasts, more than doubling from a year ago, to $18 billion.
The company nearly tripled its free cash flow to $9 billion from the same quarter in 2020. Net debt decreased by 25% to $53.3 billion year-over-year. PBR also announced a $6 billion dividend payout for 2021.
UBS has a Buy rating on Petrobras after the stronger-than-expected second-quarter results. The investment bank has had the rating since February, maintaining it even after the stock plunged due to a CEO change. In a recent note, UBS says the stock drop was an “overreaction.”
As far as international stocks go, this one is well-liked by analysts. Credit Suisse and Scotiabank upgraded the stock to Outperform (Buy) after the earnings report.
However, a recurring risk is political interference. The prior CEO was ousted earlier this year after a row with Brazil's President Jair Bolsonaro about fuel price hikes. The president faced pressure from truck drivers who protested higher diesel prices at the pump. So far, current CEO Joaquim Silva e Luna has pledged to continue executing the existing business plan and delivered the strong earnings report that sent the energy stock soaring earlier this month.
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Market value: $117.4 billionCountry: U.K.Forward P/E ratio: 4.8Estimated annual EPS growth over two years: 22.3%Analysts' ratings: 3 Strong Buy, 1 Buy, 2 Hold, 0 Sell, 0 ! Strong Se! ll
Rising demand for iron ore and copper from recovering economies worldwide is helping buoy the business of Rio Tinto (RIO, $72.52), one of the world's largest mining and metals companies. The London-based corporation reported its highest ever earnings in the first half of 2021, and also announced a $9.1 billion dividend payout.
When it comes to international stocks, Argus Research analyst David Coleman is targeting major upside for this one, per his $108 price target.
“Rio Tinto has strengthened its operating performance and balance sheet by cutting costs and selling non-core assets,” he says. “It also continues to return cash to shareholders through dividend increases. The company has traditionally performed well during difficult economic times, and, in our view, has strong long-term growth opportunities.”
In addition to the lofty price target, Coleman rates RIO a Buy.
Morningstar analyst Mathew Hodge calls Rio Tinto's first-half profits “very strong.” The company's adjusted net profit after taxes nearly tripled compared to a year ago, lifted by higher commodity prices.
Longer term, Hodge believes Rio Tinto is “one of the few miners profitable through the commodity cycle” due to its “above-average assets relative to peers.” RIO's operations are located in mostly safer havens of Australia, North America and Europe, although it has a presence in six continents, he adds.
Moreover, another positive is the company has a “large” portfolio of long-lived assets with low operating costs, the analyst writes in a report.
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Market value: $47.9 billionCountry: ChinaForward P/E ratio: 18.7Estimated annual EPS growth over two years: 7.3%Analysts' ratings: 23 Strong Buy, 6 Buy, 5 Hold, 0 Sell, 1 Strong Sell
Baidu (BIDU, $137.65) is the other name out of China featured on this international stocks list. It is second only! to Alpha! bet's (GOOGL) Google in terms of the largest search engine in the world, and commands more than 70% of the search engine market in China. Its sprawling empire also includes maps, cloud storage, an augmented reality network, advertising platform, autonomous vehicles, translation service, artificial intelligence (AI), news, social networking, and games, among others.
Founded in 2000 by Robin Li, a former employee of a Dow Jones & Co., and Eric Xu, Baidu was the first Chinese company to be included in the Nasdaq-100 Index of the largest non-financial companies. The average recommendation of the 35 analysts that follow the stock that are tracked by S&P Global Market Intelligence is Outperform (Buy).
Beijing-based Baidu primarily derives its revenue from advertising and content subscriptions. Ad revenue comes mainly from its search engine, whose algorithms use hyperlinks to measure the quality of websites it indexes.
Baidu's other core revenue driver comes from iQIYI (IQ), which is a service similar to Netflix (NFLX). BIDU spun off IQ in 2018, but retains majority ownership. This online video platform is one of the world's largest with half a billion mobile monthly active users.
Morningstar analyst Chelsey Tam has a $207 fair value price on the stock. She writes in a report that Baidu is “undervalued,” after having sold off amid regulatory uncertainty in China. The delta variant of COVID-19 also is a factor, which prompted her to cut her 2021 revenue estimate by 5%. Still, Tam calls Baidu a “leader” in AI in China since an AI-powered algorithm powers its search engine. It also is one of the largest and earliest companies to invest in AI in China.
Longer term, Baidu enjoys a wide competitive moat due to its dominant market share in search, which is “difficult” for competitors to replicate, Tam says. This dominance provides a beneficial cascading effect. “The larger the user base, the more user data Baidu can collect and an! alyze, im! proving the search engine algorithm and relevancy of search results. Users receive better, more tailored recommendations, making it less likely for users to use another search engine.”
This user data trove also gives Baidu a leg up when it comes to serving personalized ads, which leads to higher ad revenue as well. The company has “built up a network effect and a positive feedback loop” stemming from its search business, the analyst says.
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