Owning companies based in other countries that are exposed to different economic cycles can provide you with greater diversification benefits, as international equities generally rise and fall at different times from U.S. stocks.
But buying certain foreign stocks directly can be a risky proposition. A great way to benefit from global diversification is by investing in American companies with broad geographic exposure, particularly in emerging markets. We'll discuss some specific companies later, but let's first look at why this is important.
Wins and woes of investing overseas
International stocks are classified as developed or emerging markets. Developed markets, like the U.K. and Canada, are mature, established, and regulated. They enjoy higher per capita income than emerging markets, which are younger with less mature economies and less regulated capital markets. Emerging -market countries have lower relative per capita income.
Emerging-market economies are growing faster than developed markets. This doesn't always translate into better investment results, but investments with emerging-market exposure can help diversify your portfolio. Historically, when U.S. stocks perform poorly, they may have been balanced out by solidly returning international stocks. However, 2008 proved this isn't always the case.
In 2005, the developed world represented 15% of the global population yet was a dominant 79% of the global economy. Emerging markets represented 85% of the global population and a mere 21% of the global economy.
Plainly stated, emerging-market growth holds enormous potential for investors.
Get the whole world in your portfolio
Long considered one of Warren Buffett's favorite companies and top holdings, Coca-Cola (NYSE: KO ) quenches the thirst of millions of individuals and shareholders. Coca-Cola's ubiquitous brand has been labeled Interbrand's "Best Global Brand" every single year since 2001. Last year, case volume outside the U.S. represented 80% of Coke's worldwide volume. Mexico, Brazil, China, and Japan collectively accounted for 31% of worldwide volume.
Coca-Cola's diversification has contributed to its growth and its superb performance. During the hard-hitting Great Recession, Coca-Cola revenues grew 60%, from nearly $28.9 billion in 2007 to $46.5 billion in 2011. Coke shareholders have been rewarded significantly over the past five years. Meanwhile, megarival PepsiCo (NYSE: PEP ) returned shareholders more than 20%, and the S&P 500 lost nearly 4% during that same period.
KO Total Return Price data by YCharts
Investing in Coca-Cola and other soft-drink companies carries its risks. Sugary-drink companies continually face cries for bans on chemically enhanced -- and possibly carcinogenic -- caramel coloring, denouncement of their nutritional content, and ties to obesity.
But surely these difficulties won't be the end for soft drinks. The cigarette industry faced similar pressures in the mid-1990s, when it was forced to pay states billions of dollars to fund anti-smoking initiatives and pull marketing campaigns. The result? Tobacco stocks hardly budged. In fact, shares of Altria (NYSE: MO ) soared 290% from 1995 through 2005, while the S&P 500 was up 170%.
Concentrate on growth south of the border
While Coca-Cola presents sizable global exposure, there exist two companies with the same illustrious Coke brand but are pure emerging-market plays. Latin America's two largest Coke bottlers, Coca-Cola FEMSA SAB de CV (NYSE: KOF ) and Arca Continental SAB de CV (NASDAQOTH: EMBVF.PK), both boast huge growth potential with Latin America's 570 million people. These bottlers carry more risk than owning Coca-Cola, but also more potential reward.
Last quarter, Coca-Cola FEMSA saw net sales and earnings rise by nearly 30% and 20%, respectively, from the prior year's quarter. By comparison, Mexico-based Arca Continental saw net sales and earnings rise by a whopping 70% and 106%, respectively, from the prior year's quarter. Coca-Cola FEMSA and Arca Continental both boast very little debt-to-equity, with ratios just shy of 21% and 29%, respectively. Coca-Cola FEMSA's stock price gained 167% over the past five years, while Arca Continental's gained 60% in that same period.
The valuation metric EV/EBITDA takes debt obligations into account, which is important when evaluating capital-intensive companies like these bottlers. Both companies trade at roughly 11 times EV/EBITDA, which is slightly better than most peers and indicates that these stocks trade at enticing valuations right now.
When foreign headlines look ugly, instead of shunning investments with exposure abroad, realize that they may present an opportunity to slurp up great stocks at mouthwatering prices.
If you're interested in finding more great stocks with emerging-market exposure, check out our free report featuring three U.S.-based companies set to dominate global markets. The report profiles a company that enjoys 50% more revenue in China than it does in the U.S. yet holds huge potential in Russia and India, where it currently obtains less than 1% of its sales. This free report won't be around forever, so get your copy today.