Scout International's Winning Bets on Foreign Stocks
What distinguishes us from most money managers is that we're long-term investors with about a five-year time horizon for most of the stocks we own. We focus on a few major variables. One is the long-term outlook for the country where our companies have operations and another is the long-term outlook for the companies themselves. Tied into that is a focus on quality, strong balance sheets, low debt, and a growth orientation. We are looking for industry-leading, dominant companies that control their destiny and have good management and good profitability to show for it. We don't want to be in countries where you can't quantify the risks, such as smaller emerging markets, and countries such as Russia or China with strong government control of business and capital markets.
The Stats: James L. Moffett, chief international equity strategist for Scout Investment Advisors, oversees about $7 billion. His Scout International Fund (UMBWX) has beaten 90 percent of its foreign-stock fund peers in the past decade.
Moffett on his picks...
The company has a new series of cars that we think should do well. The consensus is that this year BMW will earn €4.13 a share and €5.11 next year. That means it is selling at 12½ times this year's earnings and 10 times next year's earnings, which makes it very attractive. The company has more debt than we normally like, but it's well capitalized and we think its operating margins are in good shape. The company is 44 percent family-owned. We like the large insider ownership.
2. Fresenius Medical Care
This German company is the world leader in kidney dialysis equipment, making 90 percent of the equipment sold in the U.S. It has substantial family ownership, and that is a stabilizing factor. Its earnings growth rate is steady—about 10 percent to 12 percent a year. So we are paying a premium—19 times 2010 earnings and 18 times 2011's. But that's for a stable return. Debt to equity at 65 percent is probably high, but a stable business can tolerate that more than an auto company.
It's the second-largest Spanish bank, but 55 percent of BBVA's (BBVA) profits come from outside the country. Although Spain's unemployment rate is twice ours—and its economic bubble is bigger—this bank's making money and is solvent because Spain's regulators wouldn't let it do some of the stupid things we did. They made BBVA keep a higher level of reserves. They wouldn't allow shadow banking. It trades at a low 7.4 times this year's earnings and 6.8 times next year's.
Japanese robotics company Fanuc is the real poster child for a dominant global business. It has a 60 percent market share in China's factory automation business. We don't think of China using robotic processes—it is full of cheap labor—but as it works its way up the manufacturing chain, China will become more capital intensive with more sophisticated manufacturing. Fanuc has an ironclad balance sheet, zero debt, and we see the underlying earnings growth rate in the 10 percent to 12 percent area.