Thanks to the recent rally, you may be feeling pretty good about yourself. After all, American stalwarts such as Caterpillar (NYSE: CAT ) , Disney (NYSE: DIS ) , and FedEx (NYSE: FDX ) are all up 50% or more since March 9. If you’re new to the market, you may be thinking this stock-picking stuff is easy money.
It’s not -- and this recent rally cannot continue. It’s not in the nature of U.S. large caps to offer greater than 50% returns in a year, let alone a few months. This market is seriously out of whack.
As evidence, just look at what happened to Bank of America (NYSE: BAC ) the other day. It announced that it needed $35 billion in new capital to survive a worst-case scenario -- and investors decided that meant the company was worth 30% more.
That makes no sense
There’s more evidence that the U.S. market has gotten ahead of itself, of course. Wal-Mart (NYSE: WMT ) recently decided to stop publishing monthly sales statistics, hoping it will encourage investors to take a long-term view.
Of course, they were more than happy to publish these stats when they were good, so this action would seem to indicate that they expect them to get worse. And if U.S. consumers aren’t shopping at a discount store like Wal-Mart, then where are they shopping?
Further, real estate values continue to decline and unemployment continues to rise, though at a lower-than-expected rate.
You may say, “Yeah, but the market is forward-looking.” Sure it is, but it’s not that forward-looking. If first-quarter earnings disappointments continue on into the second quarter, the market will reassess its optimism.
Tack on the inflation that’s likely to result from rampant deficit spending and, well, tread carefully in U.S. stocks.
What you can do
It’s for these reasons that we continue to look outside the U.S. for compelling stock ideas at Motley Fool Global Gains, and why we’re particularly excited about the opportunities in China, Brazil, India, Chile, and Peru.
Stocks in these countries today offer better valuations relative to their future growth prospects -- and many have been left behind by the recent rally. And the advantages over the U.S. aren’t necessarily the same from country to country.
India has a younger workforce; Chile a large budget surplus and abundant natural resources; China a massive population with significant personal savings; and Brazil and Peru growing resource economies that are developing stronger and stronger ties with China. Thus, these countries can hold up to some degree even as the U.S. falters, though complete decoupling is unlikely.
China’s tiny Yanglin Soybean, for example, is actually down more than 35% since March 1 and now trades for a paltry 0.2 times revenue and 2.5 times EBITDA. Yet this is a company that pays no taxes to the Chinese government, since it’s been classified as a Key Leading Enterprise in Agriculture and is helping that country achieve its strategic goal of becoming food-independent.
Yet if you look up Yanglin Soybean, you may be scared off. It trades over-the-counter, the stock is illiquid, and the board has no independent directors. There’s no way to be sure that the company cares a lick for outside shareholders.
It’s time to take off the training wheels
These are legitimate concerns. But I’ve already tried to assuage them. So, today, I point you to Baupost Group’s Seth Klarman’s 1997 letter to shareholders:
I frequently hear the argument that the rules are different overseas: the accounting murky, the annual reports unreadable, the currencies sometimes unhedgable. All of these points are fair, but, rather than being arguments to avoid foreign markets, they are instead arguments to embrace them. After all, as an investor you never have perfect information, and the biggest profits are always available (just as they have been in the U.S.) when competition and information are scarce. The payoff to fundamental analysis rises proportionately with the difficulty of performing it.
Yes, I added that emphasis, but it’s because it’s such a key point. Klarman goes on to say that the highest return -- the real money -- is made in markets where information is scarce and management teams are not yet obviously shareholder-oriented.
The logical conclusion
Think about that and decide what kind of investor you’re willing and able to be. If you’re satisfied with average returns, buy an index fund and enjoy the 5% or so annual gains you’ll reap from core holdings in ExxonMobil (NYSE: XOM ) and Procter & Gamble (NYSE: PG ) .
If you’re looking for more, come join us at Global Gains, where we study the foreign markets for inefficiencies and strive to pick up fast-growing, little-known names like Yanglin Soybean for dirt-cheap price tags after doing intense due diligence. Click here for a free, 30-day trial, complete with all of our recommendations. There's no obligation to subscribe.
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Tim Hanson does not own shares of any stocks mentioned. Disney and FedEx are Motley Fool Stock Advisor recommendations. Wal-Mart is an Inside Value pick. Procter & Gamble is an Income Investor selection. The Motley Fool owns shares of Procter & Gamble. The Fool’s disclosure policy is the real deal.