It's a question everybody is asking now -- how do I tap into the tremendous potential of foreign markets without getting burned?
By now, you've likely heard how large, multibillion-dollar companies such as Chinese petroleum conglomerate PetroChina (NYSE:PTR) and cell phone carrier China Mobile (NYSE:CHL) saw their stocks return 79% and 85%, respectively, in 2006. Compare that to similar U.S. counterparts such as Chevron (NYSE:CVX), up only 34%, and Sprint Nextel (NYSE:S), whose stock actually lost 10%. Many foreign markets are more fertile and less competitive, even for industries that have tepid growth in the United States.
But finding promising foreign companies is only the first step to realizing great returns. The high risks and volatility associated with many international investments make it vital that you purchase foreign shares at the right price.
Don't forget step 2
So you've identified a quality international company that has good opportunities in front of it. Now comes the most important part -- assessing the risks facing the company and the price you're willing to pay to take these risks. These risks can be associated with the company's internal operations or the economy of the home country where it operates.
While analyzing company operations is not much different than with a U.S.-based firm, external risks can be trickier to assess. Political and economic policies are difficult to predict and can have a significant impact. It's not uncommon to see some of the still-emerging foreign stock exchanges turn in 10% to 20% gains or losses in a single day. Sometimes these dramatic movements are due to local economic policy changes -- such as with Thailand's change to foreign investment policy late last year -- but they can also be in reaction to global markets, including the United States.
This added volatility and risk is precisely why it's important not to overpay for an international company. Just as you can find both very pleased and very grumpy shareholders in companies such as Qualcomm (NASDAQ:QCOM), General Electric (NYSE:GE), or IBM (NYSE:IBM) -- depending upon when they bought -- the price you pay for shares in a foreign firm can be the difference between a quick 50% haircut or a bargain with big upside potential.
The secret of safety margins
The secret of capturing foreign growth is to buy companies opportunistically -- ensure shares are priced below value to give you a margin of safety when you buy. If a company is priced at a premium, which many foreign stocks now are, wait for a better opportunity to come along. World events can quickly drop the price of a quality foreign play with a steep price into a bargain hunter's dream.
If you're in need of a few international stock ideas, one great resource is Motley Fool Global Gains. Lead analyst Bill Mann and his team scope all the risks associated with companies and countries and recommend "buy below" share prices that make a stock worth the risk. Their latest recommendations and great foreign companies they're watching can be seen with a free 30-day trial with no obligations by clicking here. And once you're in on the secret, you can pass it on to your friends without getting in trouble.
Fool contributor Dave Mock has been trying to duplicate the Golden Arches hallowed secret sauce for years to no avail. He owns shares of Qualcomm. The longtime Fool is also the author of The Qualcomm Equation. The Motley Fool has a disclosure policy.
