Emerging markets have not been winners during the bull market for U.S. stocks. To choose one benchmark, the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) has gained 17% total over the past decade. The S&P 500 has more than tripled.
To be sure, some emerging markets stocks have done well. Alibaba (NYSE:BABA) has more than doubled since going public, for instance. But on the whole, U.S. stocks have outperformed every other region — and likely every other asset class — since the financial crisis.
Some investors expect that will finally reverse. U.S. stocks look expensive, while many emerging markets stocks look cheap. After all, many of those companies have grown earnings over the past five or ten years; investors simply are assigning much lower multiples to those profits.
For investors looking for exposure beyond the U.S., caution is advised. Emerging markets unsurprisingly are more risky. Currency can play a role in returns. Dividend taxation can affect returns. As Jesus Salas, associate professor of finance at Lehigh University, told InvestorPlace:
It is good to diversify and diversifying internationally is a very good thing to do…[But] for foreign stocks, there may be an additional tax by the country where the foreign company is listed. So I would not recommend diversifying primarily to get the foreign dividend. The foreign dividend is at most as valuable as an American company dividend and it could be less (because of taxes).
Even non-dividend paying stocks in emerging markets are best suited for the higher-risk portion of a portfolio. These three stocks all have their risks. But they have intriguing rewards, too, and should be considered by investors looking to juice returns.
iQiyi (IQ)
I’ve been beating the drum for iQiyi (NASDAQ:IQ) since last year. As Chinese stocks struggled, I argued it was the best bet for bulls on China.
IQ stock indeed has rallied to a 10-month high, but I’m not yet ready to back off my recommendation. iQiyi isn’t quite the Netflix (NASDAQ:NFLX) of China, as some call it. It’s more a combination of Netflix and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) unit YouTube. Regardless, it’s a play on streaming video growth in Asia.
To be sure, IQ stock has more than its share of risk. The company remains unprofitable as, like Netflix, it invests in customer acquisition and content. Competition is bit more stiff, with iQiyi in an essentially three-company race with Alibaba’s Youku Toudu and Tencent (OTCMKTS:TCEHY). But iQiyi now has 100 million subscribers, is posting impressive growth, and looks potentially like the winner in China’s streaming video market. If it can take the top spot, IQ has a clear path to past highs above $30 and beyond.
PriceSmart (PSMT)
It takes a bit of cheating to put PriceSmart (NASDAQ:PSMT) on this list. PriceSmart technically doesn’t fall into the category of emerging markets stocks, since the company actually is headquartered in Miami.
But PriceSmart certainly is an emerging markets play. Though the company is headquartered stateside, its business is running warehouse clubs similar to those of Costco Wholesale (NASDAQ:COST) in Latin America. (Chairman Robert Price and his father Sol founded Price Club in the 1970s, and sold the U.S. business to Costco in 1993.)
PriceSmart admittedly has struggled in recent years, and so has PSMT stock, which touched a seven-year low last year. The stronger dollar has wreaked havoc on the company’s model. Unrest in countries like Nicaragua has not only led to store closures and lower sales, but impacted the company’s supply chain.
Still, there’s an attractive long-term opportunity here as PriceSmart expands. The company is focusing on Colombia at the moment and driving strong growth. The removal of the company’s CEO in 2018 led to strategic changes and could underpin an operational turnaround going forward.
PSMT will require patience and risk tolerance. There’s a possibility the company never quite reaches its potential. But Latin America, despite its issues, still is driving solid economic growth, and improved execution could finally allow PriceSmart shareholders to benefit from that growth.
Gravity (GRVY)
A simple look at the stock chart shows that Gravity (NASDAQ:GRVY) is not for the faint of heart. Shares in the South Korean video game developer have made absolutely enormous moves over the past few years. As recently as 2017, the stock was below $10. By year-end, it was above $40. 2018 lows were below $20; less than a year later, Gravity stock briefly cleared $90. It now sits at $32.
There are two reasons for the volatility. GRVY is a small-cap stock, with a market capitalization just over $200 million and a thin float of less than 3 million shares. The potential volatility inherent in that structure is amplified by the company’s reliance on MMORPG (massive multiplayer online role-playing game) Ragnarok. Like Activision Blizzard’s (NASDAQ:ATVI) World of Warcraft, Ragnarok has been around for years, which leads to fluctuating usage.
That in turn leads to fluctuating profits. Earnings soared in recent years, but operating profit declined 21% year-over-year in the third quarter of 2019. With GRVY stock trading at about 5x trailing twelve-month earnings, investors clearly are worried that the declines will continue.
But even if they do, Gravity stock might well be cheap enough. And with over $100 million in cash on the balance sheet at the end of the third quarter, there’s some downside protection here as well. Investors considering GRVY have to be ready to ride out big moves — but they also shouldn’t forget that some of those big moves have been to the upside, and could be again.
As of this writing, Vince Martin has no positions in any securities mentioned.
