Investing in international stocks can be a great way to add diversity to your portfolio, as they can reduce your vulnerability to U.S. recessions as well as currency fluctuations. However, there are certain international stocks that could make better investments than others during a stock market crash. Here's how to tell which international stocks could perform well during tough times, and a few examples to get you started.
What is an international stock?
Put simply, an "international stock" refers to any stock in a company based outside the United States, however it doesn't necessarily mean completely foreign companies. International companies can do a significant amount of their business in the U.S., and may even trade on a U.S. exchange, but are based in foreign countries.
A great example is Toyota (NYSE:TM), which trades on the NYSE and conducts a substantial portion of its business here (really, who doesn't know someone who drives a Camry?), but the company is based in Japan and derives the majority of its revenue outside of the U.S.
What kind of stocks do well during crashes?
First of all, there is no such thing as a "crash-proof" stock, but there is such a thing as crash-resistance. Some traits of stocks that tend to outperform the market during crashes and recessions include
- Low debt – During tough times, even the strongest companies cam experience a drop in earnings. If debt payments are too high, the company may have a tough time turning a profit in a recession.
- Dividend-paying stocks – This is not a rock-solid rule, as there are plenty of non-dividend stocks that perform just fine during crashes. However, investors tend to view stocks with a strong dividend history as safe, and will shift money into them during tough times. Plus, strong dividends help to create a "price floor" in stocks.
- A "wide economic moat" – This refers to a specific competitive advantage that gives the company more recession-resistant power than its competition. This could be something as simple as a superior product, brand recognition, or the ability to operate more efficiently than competitors.
- Diverse revenue sources – This is especially important for international stocks. Naturally, companies that get 100% of their revenue from the United States will be especially vulnerable during a U.S. market crash. On the other hand, companies with a geographically diverse revenue stream are less vulnerable to the economic issues of any one country, or to currency fluctuations.
A couple of examples
Here are a couple of international stocks that could help your portfolio survive a crash
1. Nestlé (NASDAQOTH:NSRGY) – Headquartered in Switzerland, Nestlé is the largest food company in the world by revenue, and operates in 194 countries around the world.
Not only does Nestlé have a geographically diverse revenue stream, it also has a vast portfolio of products with tremendous brand recognition, and therefore pricing power. In fact, Nestlé has 29 brands that produce more than $1 billion in revenue per year apiece, and has more than 2,000 brands altogether, including Nesquik, Stouffer's, Kit Kat, and Nespresso, to name just a few.
Only 25% of Nestlé's sales come from the U.S., and the company's international business is growing at an impressive rate, especially in emerging markets. And, the company has done a good job of reducing debt lately with a 16% reduction in the past year alone, and total net debt of 12.3 billion Swiss Francs (about $13.3 billion U.S. Dollars) – a low debt load for a company that does nearly $100 billion in annual sales.
2. Toyota Motors – The world's largest vehicle manufacturer is also one of the most profitable, and is a great example of how a diverse revenue stream can still allow for growth, despite weakness in any particular market.
For example, Russia and several emerging markets are producing weak sales, and Asian demand has fallen in 2015, but thanks to a strong U.S. and improving demand in Europe, Toyota's revenue is still expected to grow year-over-year. And, in 2008 and 2009, while American automakers saw sales plummet and profits disappear, Toyota's sales fell by 11% peak-to-trough (in U.S. dollars), and quickly rebounded to even higher levels than their pre-crash highs.
One of Toyota's most crash-resistant qualities is its profit margin, which is consistently the best of its peer group.
In a crash or recession, Toyota has the ability to absorb more of a revenue contraction than other automakers since it operates at such a high margin. In other words, Toyota could lose 500 basis points of profit margin and still remain profitable. Ford, GM, and Honda could not.
Or, an ETF may be the way to go
Of course, if you simply want international exposure in your portfolio, but don't want the guesswork of picking individual stocks, an ETF that focuses on international stocks could be the way to go.
For example, the Vanguard Total International Stock ETF (NASDAQ:VXUS) has an extremely low 0.14% expense ratio (88% less than its peer group) and invests proportionally in 5,846 different non-U.S. companies. This allows you to further diversify your portfolio, both geographically and with stocks from different sectors.
Every portfolio needs some international exposure
No well-rounded investment portfolio is complete without some exposure to international stocks, either in the form of individual stocks or an ETF. The right kind of international stock exposure will provide you with protection from U.S. crashes and currency fluctuations, while also providing the same growth and income opportunities as U.S. stocks.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.