by Jeff Reeves | January 17, 2014 3:04 pm
There’s a lot of talk about how U.S. stocks have run up a lot in 2013, and that valuations are getting a bit stretched.
Right now the S&P 500 trades for a current P/E of about 19.9 and a forward P/E of 16.3 based on data from Finviz.com. And investors should easily be able to name a few stocks that trade for tremendous earnings multiples — Amazon (AMZN), Twitter (TWTR) and Tesla (TSLA) being the prime examples.
So will the run continue for these stocks? Maybe. After all, multiple expansion is the hallmark of a bull market and its not necessarily a sign of disaster to see high-growth companies trading at big valuations. I mean, AMZN stock is up 44% in the last year and 600% since 2009 with barely a downtick despite trading at a steep premium to earnings.
But if you’re an investor who wants to look for some value investments as well as some growth investments, you may have to look overseas for companies trading at deep discounts to earnings, sales or book value.
Here are 5 cheap countries to consider, and the ETFs and stocks that will let you play them — without making a single trade on foreign stock exchanges:
Among U.S.-listed stocks that trade as ADRs, South African issues total a market capitalization of a little less than $40 billion. That makes South Africa the 25th most valuable region by assets — straddled by Sweden at No. 24 and Argentina at No. 26.
But South Africa is an interesting play for 2014 in that it is the best way to directly invest in sub-Saharan Africa and all it’s growth potential. And with forward P/E of just 9.3, it’s also a pretty decent value play at the same time.
Charles Sizemore, editor of Macro Trend Investor, is a massive bull on Africa in general:
“It’s the last major investment frontier, and the growth is very real. Per capita GDP has more than doubled in the past decade, and according to Deloitte, seven of the 10 fastest-growing countries in the world are in Africa.”
So how can you play this trend if you want to share in the potential of South Africa?
For starters, there’s the iShares MSCI South Africa ETF (EZA). The fund is down about 11% in the last year, but remember that emerging markets dramatically underperformed across the board in 2013. And if you believe in value investing, this may be a good opportunity to buy.
If you want to play stocks directly, one great options is telecom play MTN Group (MTNOY). Smartphones can provide even remote villages tremendous communications and commerce power to unlock growth, and MTN is a key part of that narrative across Africa. Chemicals and energy company Sasol (SSL) is more of a cyclical play but also headquartered in South Africa.
Though North Korea clearly has its problems under the Kim regime, South Korea is very much an emerging western power with a functional government and economy.
The Korea Stock Exchange, or KOSPI, is valued at roughly $1 trillion — with heavyweight Samsung (SSNLF) representing almost 20% of that total.
Of course, Samsung’s massive presence has weighed on the region lately. In the last 12 months, the iShares MSCI South Korea Index Fund (EWY) has declined about 4%, pretty much the same performance as Samsung’s stock.
But after the declines, there may be good value to be found. South Korean stocks that trade on U.S. exchanges have an average P/E of around 9.6 according to Finviz, and also trade at about a 40% discount to sales and a 40% discount to book value.
The EWY fund is about 20% allocated in Samsung if you want to play the region broadly instead of simply in the tech and industrial giant itself. After all, Samsung is clearly a global play and not just a Korean one.
Other options include Korean steel giant Posco (PKX), though admittedly this is much more of a global player and subject to commodity trends instead of South Korean growth.
Lest you think only emerging markets and frontier markets have value, consider the developed economy of France if you’re looking for a bargain buy. The region trades for a forward price-to-earnings ratio of about 10.0 and a 20% discount to sales.
Surprising? Well, you’ll probably find this even more interesting: French stocks are up about 20% in the last six months or so to almost double the performance of the S&P 500. So this discount valuation comes even after a decent period of growth.
So how can you play this trend? The iShares MSCI France ETF (EWQ) is one way, via a diversified fund that owns some of the biggest names in France. There’s also oil giant Total (TOT), which is headquartered in France but has a global flavor, as well as French healthcare giant Sanofi (SNY)
But if you want a true French investment, consider French financial giant Societe Generale (SCGLY). Soc Gen is a giant in retail and investment banking for the nation, with a market cap of almost $50 billion. And like American banks, SCGLY is a focused play on a cyclical recovery that results in increased business and consumer lending.
This is one of my personal favorite regions for investment in 2014.
There’s no doubt that China is evolving from an emerging economy to a developed one, and that evolution is going to come with growing pains.
But China just projected that its GDP likely grew at 7.6% in 2013 — above the 7.5% forecast set in March, and down only 0.1 percentage points from 2012 GDP. And while early last year we saw trouble in manufacturing and exports, those trends have started to stabilize and move in the right direction.
From a valuation perspective, China is cheap compared with future earnings. Chinese stocks have a forward P/E of about 10.6, trading at a price/sales ratio of 0.65 for a 35% discount. Also, The PEG ratio — that is, the price compared with earnings growth — is attractive. Furthermore, Hong-Kong based companies that do a lot of business in China are also looking cheap. The P/E for this neighboring nation is 10.7.
Of course, China stocks got gutted in 2013, so some investors are still leery. Furthermore, risks of opacity or corruption thanks to the command-and-control government in Beijing are very real.
So if you want to play China, I advise a broad play via the SPDR S&P China ETF (GXC). It’s reasonably cheap with expenses of 0.59%, or $59 annually for every $10,000 invested. It’s also much more diversified with only three stocks allocated at over 3% of the fund and no pick over 7% allocation. That’s much safer than the more popular iShares FTSE China Large Cap ETF (FXI), whose top five holdings have a massive 40% allocation collectively.
If you want a direct play on China, one of the few individual equities I feel comfortable owning is oil giant CNOOC (CEO). It’s a state-run oil company that is a decent play on the region’s growth, and also a decent bargain right now.
Russia may want to act like the top-down approach of the Soviet-era is a thing of the past, however this nation shares many of the same problems with China in regards to government interference and corruption.
But in contrast to China, the growth isn’t as impressive. Russia’s economy is projected to grow about 2.6% after a pretty weak 1.5% expansion in GDP for 2013.
So why buy Russia?
Well, because the BRICS have been pretty much left for dead lately. As a result, Russian stocks on U.S. exchanges typically have a forward P/E of about 11.3 and trade at or slightly below book value.
And when you talk about untapped potential, Russia could be one of those regions like China that sees explosive growth once it manages to leverage its massive population and resources in the right way.
This pick is even riskier than China, so your best bet is the diversified Market Vector Russia ETF (RSX).
But if you want to roll the dice on a risky but high-reward play, consider telecom giant Yandex (YNDX). This company is actually based in the Netherlands, but operates the leading Russian web portal, with search and email services. It’s essentially the Google (GOOG) of Russia.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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