Thanks to the recent rally, you may be feeling pretty good about yourself. After all, Dow members such as American Express (NYSE: AXP) and DuPont (NYSE: DD) are up 20% or more year to date. 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 such enormous returns in such a short period of time. This market is seriously out of whack.
That makes no sense
And while Fed Chairman Ben Bernanke has declared the recession "very likely over," unemployment still hovers close to 10%, the credit markets are still anemic, and consumer activity is being subsidized by the government.
You may say, "Yeah, but the market is forward-looking." Sure it is, but it's not that forward-looking. 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, and Chile.
Stocks in these countries today offer better valuations relative to their growth prospects. 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 a growing resource economy that is 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.
Tiny China Marine Food (AMEX: CMFO) trades for just 1.8 times sales and 7.4 times EBITDA. Yet this is a company that is growing quickly, should end the year with $40 million in net cash, and continues to sign new distribution deals for its snack foods.
Yet if you look up Yanglin Soybean, you may be scared off. It only recently listed with AMEX, the stock is somewhat illiquid, and the company is contemplating raising $40 million in equity. There's no way to be sure that the company will spend this shareholder money well.
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 only 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 Johnson & Johnson (NYSE: JNJ) and IBM (NYSE: IBM). And yes, you're getting those same kinds of big, staid megacaps, even when you purchase an emerging-markets index fund. Top holdings in Vanguard's offering are $200 billion China Mobile (NYSE: CHL) and $45 billion Teva Pharmaceutical (Nasdaq: TEVA) -- an "emerging-markets" company that actually earns the bulk of its revenue in these United States.
If you're looking for more than that, then sign up to get our free real-time dispatches from our upcoming Global Gains research trip to India. We'll be meeting with a collection of promising India companies and in-country analysts and investors who will give us the scoop on the local market.
We take off in less than two weeks, so tell us today where we can send our notes.
This article was first published on May 14, 2009. It has been updated.
Tim Hanson
does not own shares of any stocks mentioned. American Express is an Inside Value recommendation and Johnson & Johnson is an Income Investor pick. China Marine is a Global Gains selection. The Fool's disclosure policy is the real deal.
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