There are several reasons investors look to ADRs (American Deposit Receipts) as a means to diversify and gain exposure to other countries and economies without the complexities and fees of buying foreign companies from their home exchanges. The ability to benefit from comparative advantages in other countries such as labor, materials, growth opportunities while not being completely tied to the success or demise of the US stock market are just a few reasons why ADRs may look appealing. There will be times when US markets are less attractive than others and ADRs provide investors an easy way to participate in those economies and also hedge against complete exposure to the dollar.
AFG’s research and investment tools help investors uncover attractively priced equities regardless of the company’s characteristics (Market Cap, Sector, Industry) or country of origin. Having one consistent process that creates a set of economic financial statements that focus on the entire cash flow a company generates, puts our clients in a better starting position to identify mis-priced equities regardless of time, industry, sector, market-cap or region. This systematic approach to valuing companies that is rooted in Economic Margin methodology allows for better comparability between companies, eliminates many of the typical distortions in “As-Reported” accounting data and allows us to come to meaningful valuation conclusions for over 20,000 companies around the world.
For those investors looking to add some exposure to Non-US companies via ADRs we will provide a focus list of 25 ADRs, from every economic sector as a solid pool of candidates worthy of consideration as potential buy ideas. These companies all receive good marks according to AFG’s Investment Grade model which evaluates a company’s valuation attractiveness, management and earnings quality as well as momentum factors. A letter grade of A-F is assigned to each stock, based on how attractive it is as an investment opportunity. This model has a successful track record at identifying winners and avoiding potential losers as evidenced in the performance chart below. Over the past 10 years ADRs with Investment Grade of “A” have outperformed the Russell 1000 by 6.8% on average and the “F” Grade firms have underperformed the Russell 1000 by nearly 8%.
The 25 ADR’s listed below will help provide some investment ideas to gain some equity exposure to 13 different countries and 11 different AFG sectors.
Next we can take our analysis one step further and look at the Company Snapshot for one of the companies on our list. Since Toyota Motors (TM) is one of only 2 “B” Grade companies provided on our list we will investigate the basic factors that go into our Investment Grade metric and see what is keeping TM from earning an “A” Investment Grade.
Below is the Company Snapshot Page for TM that provides a little more detail into the 6 main factors that make up our Investment Grade. The company looks inexpensive from a valuation perspective and receives passing marks for Price Momentum and our Quality metrics (Earnings & Management).
The drawback for TM is its most recent drop in Economic Margin levels and its expected EM improvement lags behind its sector and industry peers which is where it receives negative marks. While EM’s are declining, TM still earns a positive EM and has a lower implied EM than what we are expecting them to deliver.
With an attractive valuation, positive EM level and a management team that has been able to improve or maintain EM levels for the last decade, TM still looks like an attractive ADR investment opportunity.