ADRs offer investors several advantages that include benefitting from comparative advantages in other countries (ie. Materials/labor), the ability to diversify and hedge against complete exposure to the US Dollar/Economy at times when US markets may become less attractive and the ability to participate in foreign markets/economies without the complexities and fees of buying foreign companies from their home exchanges.
The major benefit to using AFG research tools to help pick stocks is that we use the same process for evaluating securities regardless of the company’s characteristics (Market Cap, Sector, Industry) or country of origin. We have a systematic approach to valuing companies that starts out by converting “As-Reported” GAAP accounting data into a set of economic financial statements that focus on the entire cash flow a company generates. This allows us to put companies with vastly different characteristics (such as ADRs) on the same playing field and allows for much better comparability between companies. By focusing on a company’s true economic profitability or Economic Margin, we can cut through the “noise” and distortions of traditional accounting metrics and put a spotlight on a company’s true underlying economic vitality.
By using AFG’s multi-factor Investment Grade model, which is deeply rooted in Economic Margin methodology, we can come to meaningful valuation conclusions and quickly identify attractive investment opportunities from anywhere around the globe as this model provides a simplified overall letter grade based on the rankings within each of the factors within the model (valuation, quality and momentum factors).
Implementing a strategy of buying/owning “A” Grade companies and selling/avoiding “F” Grade companies can put investors in a better position to outperform. There are 2 ways we track this strategy that illustrate how well this strategy works within the ADR universe, 1) by back-testing the performance of A Grade vs F Grade ADRs and 2) AFG has a strategy that provides monthly buy ideas of “A” Grade ADRs that we track/benchmark against the Russell 1000 index. In the chart below you will see that under any time frame (1 yr, 3 yr, 5 yr, 10yr) that a significant spread is achieved between “A” and “F” Grade stocks within AFG’s ADR universe. The following chart highlights the annualized performance of our ADR Monthly Buy Idea product relative to the benchmark (Russell 1000).
AFG has a proven track record of being able to uncover attractive investment opportunities from within our ADR universe. For investors looking to add some exposure to foreign markets, the table below contains 25 ADRs from every economic sector that currently earn an AFG Investment Grade of “A” and look attractive from a valuation perspective. This list can serve as a solid starting point for investors looking to add ADRs to their client portfolios.
Attractive ADRs From Around the Globe