Last week, I made a brief case for expanding your investing horizons by looking for friendly foreigners. I'm not advocating fleeing the country, but the economic party that Americans have been having -- without paying cash -- is likely to create some kind of hangover, and I stand with many (far smarter) investors when I say that U.S. investors ought to give serious thought to putting some of their assets into good overseas firms.
Last week's companies were chosen by screening for qualities that made them akin to the firms Tom Gardner digs up for his market-thrashing Hidden Gems. Overlooked companies that have good balance sheets, small market caps, and free cash flow are -- in our Foolish opinion -- much more likely to outrun the market over the long run. The best of them turn into multibaggers, sometimes in short order.
The foreign screen was loose. Here were the criteria:
- Market cap between $100 million and $2 billion
- Enterprise value-to-free cash flow below 15, or thereabouts
- Insider ownership of more than 5%
- Net margins growing over the past year
- ADR or ADS shares available on major U.S. exchanges
The two that showed up on my foreigner screen, Sadia (NYSE:SDA) and De Rigo (NYSE:DER), could not have been more different: a diversified pork and poultry producer and a family-run eyeglass business. Yet both of them are revving up despite tough business climates, and they look poised to outpace the broader market.
Eyeball the also-rans
One thing I like to do after running a screen is to get rid of criteria, one at a time, just to see what isn't making the cut. It's like a dictionary search. While thumbing through the pages, looking for what you think you're looking for, you find all sorts of other interesting stuff along the way, like words your Momma would never let you say.
This week, I turn my attention toward a pair of stocks washed up onto my spreadsheet, despite failing to meet the strictest criteria of the screen. One's a steady highflier in a boring business, and the other is a fallen highflier that might just qualify for the "toxic sludge" portion of your portfolio. (I steal that phrase from my always-clever colleague, Bill Mann.)
Tequila tourism
How's this sound? A government-granted monopoly toll bridge in one of the world's most popular tourist destinations? That's sort of what you get with Grupo Aeroportuario Del Sureste (NYSE:ASR), or "Southeast Airport Group," in the parlance of our times. (I'm just going to call the firm ASR, and save on the carpal tunnel stresses.)
This company, created in the late '90s, operates nine airports in the north -- just kidding; it's the southeast -- of Mexico, including the Puff Daddy of them all, Cancun, where airplanes schlep thousands of hopeful, hormone-crazed collegians. If you'd like to try to escape the gyrating "Funky Cold Medina," crowd, you can disembark in ASR facilities in Merida, Cozumel, Villahermosa, Oaxaca, Veracruz, Huatulco, Tapachula, and Minatitlan. (I'm not kidding about these places being quieter. They see only a fraction of the travelers at Cancun.)
These airports are, quite literally, tollbooths. They extract passenger fees from travelers to these destinations, as well as rake in dough via rents and concession fees levied on businesses that operate in the airports. Duty-free sombreros and wormed spirits in your carry-on? ASR will get a cut.
As you can guess, this can be a very profitable business. How'd you like to have been in on the action of a chart like this? Yeah, they always look great in retrospect, unless you bought at the left side of this one and sold somewhere toward the middle. That's one of the risks of this business. It's not exactly cyclical, but it can be volatile. When tourists are scarce, ASR's finances go down the drain. But when travelers are flying to Mexico, as they have been this year, things look great. Passenger increases in the teens and low 20s have driven revenue increases in the range of 20% to 30% over the past three quarters. Earnings per share have shot up even more quickly, from 44% to 74%. Margins have improved and free cash flow has accelerated. What's not to like?
It all depends on whether you see the shot glass as half full or half empty. On the half-full side, the travel industry is continuing to roll after a dismal couple of years. Just check out recent results from Priceline.com (NASDAQ:PCLN) and others. If the American economy is indeed turning, more and more Americans may be packing their bags. In anticipation of future traffic loads, the ASR board has ordered the construction of another runway at Cancun.
On the half-empty side, there's the possibility that travel to these destinations may be peaking, or at least that upcoming quarters' growth won't look nearly so robust, since it will be compared to the healthier recent levels instead of the depressed, post-911 travel doldrums. There's also been plenty of talk in the press about a drug war in Cancun, but whether that will stop American visitors from remains to be seen. Heck, there was a drug war in my neighborhood in New York years ago, and that didn't keep people away.
A more frightening realization is the fact that the airports' futures depend on both the airline industry and the Mexican government, neither of which can be accurately described as stable. Finally, a complex mix of international and mandated Mexican ownership, plus related transactions, make you wonder if common shareholders aren't just along for the ride. (Check the annual reports, and pack a lunch.) There's great promise here, but keep your eyes peeled, folks, and take a closer look.
Guns 'n' spandex
Ever hear of Lara Croft, the Tomb Raider? I thought so. She was plenty famous even before Angelina Jolie started parading around on the big screen with those eye-catching rubber outfits. How about the massively popular, macabre game called Hitman? These are just a couple of the major productions from well-known London-based video game maker Eidos (NASDAQ:EIDSY).
With hits like this, you might wonder how the firm could be trading at a 52-week low. Well, a nightmarish chart like this one might give you some hints that something must be desperately wrong. Somehow, Eidos' management has proved incredibly adept at snatching defeat from the jaws of victory. It starts at the top line. Despite the cultural cache of some of its titles, sales have been stagnant for years. The bottom line has showed red ink for a long time as well, with last year's anomalous profit owed to one-time items.
Factor in a sub-$2 share price and thin trading volume, and you'll see why I refer to this as toxic sludge. Penny stocks like this one can really burn investors. So why do I bring it up at all?
Well, because the company isn't burning cash so quickly that it's in immediate danger of going under. In fact, with no long-term debt and $69 million in cash at the end of June, you can buy the intellectual property and the video game biz today for just about $140 million.
After years of failure to produce for shareholders, management recently announced its intention to put the firm up on the shopping block. It's taking bids, but there are no reported takers as of yet. In the meantime, the stock has continued to swoon. How many other game makers out there trade far below revenues? Would Eidos be a good pick-up for someone like Activision (NASDAQ:ATVI) or Electronic Arts (NASDAQ:ERTS)? How about bigger fish like Sony or Vivendi? Surely someone out there could turn a profit on Eidos' well-known franchises. Meanwhile, game investors may want to keep their eyes on this sludge and try to pick some up for less than a potential buyer might pay. (I'm punting on what that might be. At least for the time being.)
The plane ride home
In the end, investing is a lot like travel: It's tiring, but fun, and all of it is scary at first, especially the further you get from home. But the more you do it, the better you get. Legions of successful investors, including Peter Lynch, have done very well by turning their attention to successful foreign firms. So keep looking for bargains far and wide, and look hardest at the ones that everyone else ignores. If you don't find a 10-bagger, you'll learn a few things to help you dig one up further down the road.
For related Foolishness:
- Priceline keeps looking up.
- Tim Beyers has suggestions on how to find some pennies from heaven.
- Learn the secrets to finding Lynch's 10-baggers.
Seth Jayson will be heading to Amsterdam for the holidays, where he promises to shop only for excellent investment ideas. At the time of publication, he had positions in no company mentioned. View his stock holdings and Fool profile here. The Fool's rules are here.
