Don't Be Scared

Rewind to late 2003. The market is beginning to heat up after a chronic malaise. Stocks are all the rage again. You're dying to invest, but all you know is what industries you want to avoid. Industries like, say, automobiles.

And with good reason. Take General Motors (NYSE: GM  ) . Even though the stock is trading for roughly seven times earnings, a trip through the financial statements reveals that debt is ballooning and returns on shareholder equity are falling through the floor. What's more, you read in April that GM couldn't guarantee it would make its earnings projection for the year. Now, in December, it seems GM may barely meet its goal. So with January looming, you cross all the carmakers off your list.

Big mistake.

Looking for portfolio love in all the wrong places
No, not avoiding the U.S. automakers. That would've been brilliant:

Company

1/2/2004Closing Price**

3/29/06Closing Price

Total Return

General Motors

$47.56

$22.15

(53.4%)

Ford Motor (NYSE: F  )

$14.87

$8.26

(44.5%)

DaimlerChrysler

$44.31

$56.98

28.6%

**Adjusted for reinvested dividends. Data provided by Yahoo! Finance.

But there was lots of money to be made investing in automakers operating outside the U.S. Indeed, they've delivered massive returns since 2004:

Company

1/2/2004Closing Price**

3/29/06Closing Price

Total Return

Toyota (NYSE: TM  )

$47.56

$109.26

62.6%

Honda (NYSE: HMC  )

$22.08

$31.63

43.3%

Nissan

$21.73

$23.85

9.8%

**Adjusted for reinvested dividends. Data provided by Yahoo! Finance.

Your mail-order stocks have arrived
Would any of these stock ideas have been hard to find? Not really. Industry researcher Value Line covers them all. (Tip: You can usually find Value Line at your local library.) And reports from back then show that most of these automakers -- Nissan was the exception -- had steadily increased margins, returns on capital, and returns on equity from the dark days of 2001. In short: They were creating value just as fast as General Motors was destroying it.

Pick just about any rotten industry here in the U.S., and I guarantee we can find similar examples. Don't believe me? Fine, let's take telecom. No doubt, you'd have to be pretty brave to invest in a major U.S. telco such as Qwest, but plenty of opportunities exist abroad. In particular, one carrier has a virtual monopoly in its region and generates a return on invested capital in excess of 16%. It also sports a dividend yield that makes AT&T's (NYSE: T  ) 4.9% payout look puny, and it's one of the 14 highlighted selections for The Motley Fool's inaugural international stock report, Around the World in 80 Minutes. (To find out more, click here.)

Screening for winners
The lesson? Don't ignore rotten industries when you're searching for promising investments. You'll either miss firms with turnarounds in progress, or end up ignoring excellent companies profiting somewhere else.

Plus, screening for international winners isn't that difficult with a tool such as Capital IQ. To prove it, I opened the screener and searched for commercial airlines in developed European markets such as the U.K. Fifteen minutes later, I had three potential candidates. Adding a minimum requirement of 5% return on capital limited the field to just one: plucky Ryanair Holdings (Nasdaq: RYAAY  ) of Ireland. The stock has been a huge winner over the last two years.

The Foolish bottom line
Remember: For every bankrupt Delta, there's a Ryanair hanging out in some obscure airport. Such opportunities are tailor-made for the Foolish investor. So don't be scared. Be worldly, instead. You'll be a lot richer for the experience.

Fool contributor Tim Beyers hopes to get back to Florence someday. In the meantime, he'll settle for researching international stocks. Tim didn't own shares in any of the companies mentioned in this story, although he and David Gardner collaborated on one of the picks in theInternational Report. Tim suggests you give it a try. You can get it free with a one-year subscription to any of our investing newsletters. Find out which stocks are in Tim's portfolio by checking his Fool profile. The Motley Fool has an ironclad disclosure policy.


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10/24/2014 4:00 PM
F $13.78 Down -0.62 -4.31%
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HMC $31.07 Down -0.55 -1.74%
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RYAAY $53.80 Up +0.19 +0.35%
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