A Turning Point for Multinational Stocks; According to new research, overseas exposure should soon be less of a drag– and perhaps a boost

TUESDAY, DECEMBER 24, 2013

A Turning Point for Multinational Stocks

By JACK HOUGH | MORE ARTICLES BY AUTHOR

According to new research, overseas exposure should soon be less of a drag– and perhaps a boost.

A new statistical indicator suggests U.S. stock-buyers should favor companies with high foreign sales. For a given group of stocks, the revision ratio is the number of issues with recently raised earnings estimates divided by the number with reduced estimates. It offers an early look at whether business conditions are broadly expected to improve. Among companies in the Standard & Poor’s 500 index, those with high foreign sales exposure have long had worse revision ratios than pure domestics, but that’s changing.According to a recent report by Bank of America Merrill Lynch, the revision ratio for multinationals bottomed in April 2012 and has since been slowly recovering, while that for domestics has been deteriorating since May. The two ratios recently intersected. In other words, the foreign sales exposure that has been a drag for U.S. companies in recent years may soon begin giving them a boost.

Even better, with U.S. stock prices hitting record highs, plenty of companies with high foreign sales trade at discounts to the broad market. For example, the technology sector has the highest foreign exposure of the 500 index, at 59% of last year’s sales, according to S&P. It recently traded below 14 times next year’s earnings forecasts, versus 15 for the broader index, 13.9. The energy sector has the second-greatest exposure, with 53% of sales from foreign sources. It trades at less than 13 times next year’s earnings. Investors can buy into these sectors with exchange-traded funds like iShares U.S. Technology(ticker: IYW) and Energy Select Sector SPDR (XLE).

Stockpickers can fine-tune their overseas exposure. In July, Barron’s recommended four U.S. companies with plenty of European sales (see Feature, “How to Play Europe’s Recovery With U.S. Stocks,” July 27). They’ve gained 14% since then, versus 8% for the S&P 500. Autodesk (ADSK), DuPont (DD) and Owens-Illinois (OI) have beaten the market while Ford (F) has lost ground. Other companies with high Europe exposure include General Motors (GM) at 29% of last year’s sales, according to S&P, and General Electric at 19% (see Feature, “GE: Not Too Big To Grow,” Sept. 21).

In Latin America, Mexico’s central bank predicts the pace of economic growth there will more than double next year, to 3% to 4%. The outlook is different in Brazil, where policy makers recently lowered their 2014 growth forecast to 2%, versus 2.3% for this year. But Mexico’s stocks look expensive. The iShares MSCI Mexico Capped ETF (EWW) recently traded at 26 times earnings. PepsiCo (PEP) is cheaper at 19 times earnings and collects 17% of its sales from Mexico. Diamond Offshore Drilling (DO), at 12 times earnings, collects 12% there.

Asian economies are a mixed bag. Investment bank Nomura cites Korea, the Philippines and Malaysia as potential leaders and China and India as laggards, but those terms are relative. For example, Nomura expects China’s economic growth to slow to 6.9% next year from a recent rate of 7.8%, but the lower number is still fast growth. Chip makers top the list of companies with high sales exposure across Asia. Intel (INTC), for example, is at 57%. It sells for 14 times earnings. Boeing (BA) collects 20% of sales in Asia, but the stock price is starting to look lofty. This column argued in January that shares could gain 50% in a year as rising sales and falling development costs release rising free cash (see Ahead of the Crowd, “Why Boeing Can Soar 50%,” Jan. 10).

That has happened, and Boeing recently boosted its dividend and its spending on share repurchases. But shares are up 80% since our story and go for 20 times earnings. A cheaper bet: General Motors, at 12 times earnings, not only has high exposure to Europe but collects 8% of sales in Asia, too.