3 Stocks Ready to Shake the World

If you have kids -- or if you ever were a kid -- you're probably familiar with the classic Disney movie The Jungle Book, from the 1894 book by Rudyard Kipling.

My favorite character in the movie is the villain, Shere Khan, a sophisticated tiger with a calculating and explosive disposition. It might seem childish, but it's useful to compare this character with the emerging markets of the 21st century.

If you've read Kipling's book, you think of Khan far differently. He's crippled, arrogant, and troubled.

Sadly, emerging markets have recently resembled Kipling's original tiger more than the Disney version that I prefer. Since Halloween, the iShares MSCI Emerging Markets Index has shed nearly 20% of its value.

Meow
Before I get carried away with this roaring analogy, let's cut to the chase and ask the question that savvy investors are asking: Were the past few years of great emerging markets' returns just a flash in the pan? Or were they part of a secular long-term trend?

Well, history can offer a useful lesson. He probably wasn't thinking about stocks at the time, but consider what Napoleon Bonaparte said 200 years ago about one such market:

Let China sleep, for when it wakes, it will shake the world.

I've no doubt that Monsieur Bonaparte would be astounded -- and scared -- by the sight of this rising giant. Warren Buffett he wasn't, but Napoleon did see the massive potential of the Far East before just about anyone.

Got a tiger by the tail?
China isn't the only emerging-markets opportunity, either. Long-term financial indicators (per-capita consumption and investments in infrastructure among them) suggest that this is the very beginning of a massive global shift in today's economic paradigm. NAFTA doesn't have front-row seats to this show, so perhaps it's time for you to take a look at your own portfolio.

Experts agree. The Wizard of Wharton, Jeremy Siegel, has long advised that 40% of your portfolio be outside the land of Uncle Sam. Ralph Wanger, the founder of Wanger Asset Management and the tremendous Acorn funds, suggests that the best way to maximize return while limiting risk is to send much of your portfolio abroad.  

So, are you close? Judging by statistics, you're probably not. But you can catch up.

Great companies are great companies anywhere
Even if you feel you've missed the boat on the tremendous international gains of the past few years, the story has only just begun. The way to find incredible international stocks is much the same way we do it here in the U.S.:

1. Stick with small companies or names that aren't on the radar. It's true that international giants such as Unilever (NYSE: UL) and Honda (NYSE: HMC) can be solid, steady investments. And while they will help you diversify away from the dollar, global giants like these still correlate with the U.S. economy. If you're looking for tremendous gains and companies that will zig when the U.S. zags, stay small and off the beaten path. There's some risk to this strategy, but the extra effort should prove to be worth it.
2. Insist on excellent financial performance. Look for increasing levels of free cash low, manageable levels of debt, and strong returns on capital, similar to those you'll find with great (and formerly small) American companies such as Netflix (Nasdaq: NFLX). No matter the size or location of the stock you're researching, never compromise on the fundamentals.
3. Identify businesses that can leverage a competitive advantage into long-term growth in their region. Again, there's no reason to take added business risk when you're already investing abroad.
4. Get 'em at a nice price. Immature emerging markets tend to be volatile. Take advantage of that volatility to buy choice stocks when they dip.
5. Settle for nothing less than top-notch management. Looking for the developing world's next Wal-Mart (NYSE: WMT)? Then you better have someone like Sam Walton at the helm. Walton was an excellent steward of his shareholders' money, owns a significant percentage of his own company, and was accessible and transparent. This quality is of the utmost importance, yet both in the U.S. and in emerging markets, it can be one of the hardest to find.

3 stocks that fit the part

The companies above match well with points 1 and 2. But as intriguing as these companies appear, each one deserves a lot more study. That's because while the larger trends indicate that emerging markets are coming to power, you can't just point and shoot.

For example, American Oriental Bioengineering, a maker of traditional Chinese medicines, had a rocky start in American markets because it came public via a somewhat sketchy reverse merger and even paid a stock promoter to publicize its shares. While that company is on much stronger ethical footing today, you'll want to know the background of any emerging-markets company you decide to invest in.

What it will take
Identifying business strengths and assessing value takes effort ... and finding the world's best managers requires even more. Yet the next century's greatest returns will come from investments in dynamic economies like those of China, Brazil, and Vietnam.

Your extra effort in research and due diligence will reap rewards.

If you're ready to start investing abroad, sign up with our Motley Fool Global Gains international investing service free for 30 days. You can read all of advisor Bill Mann's research -- including his top picks for new money now -- with no obligation to subscribe.

Fool analyst Nick Kapur does not own shares of any company mentioned, though he's willing to discuss any Disney characters he could include in another useful market analogy. Disney and Netflix are Stock Advisor recommendations. Wal-Mart is an Inside Value recommendation. Unilever and Compania Cervecerias Unidas are Income Investor recommendations. The Motley Fool has a disclosure policy that's practically perfect in every way.