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10 bargain, high-quality global equities

Susan Dziubinski  |  13 Sep 2018Text size  Decrease  Increase  |  
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This column regularly culls investment ideas from Morningstar's proprietary indexes. We've shared undervalued picks from our US stock-focused wide-moat index, dividend growth index, and even our exponential technologies index. The indexes have proven to be fertile ground, providing investors with names to investigate further.

Today, we're going global: We've sifted through the Morningstar Global ex-US Moat Focus Index in search of undervalued foreign stocks.

The Global ex-US Moat Focus is a subset of the Morningstar Global Markets ex-US Index, which is a broad index representing 97 per cent of developed (ex-US) and emerging-markets market capitalisation. We rank the wide- and narrow-moat stocks in the broad index by lowest price/fair value to find the 50 cheapest wide- and narrow-moat stocks. These 50 stocks represent the most compelling values among the global moat universe, according to Morningstar analysts.

The Global ex-US Moat Focus Index invests in securities in their local currencies, on their local exchanges. For purposes of this article, we focused on companies from the index that also have shares listed on US exchanges. Australian investors can access these companies using trading platforms such as CommSec.

Here are the 10 companies from the index whose US-traded shares are at the deepest discounts to our fair value estimates as of this writing.

10 cheap, high-quality foreign stocks

Here's a closer look at three stocks from the list.

Vodafone Group PLC VOD
Discount to Fair Value Estimate: -32%
Economic Moat: Narrow
Moat Trend: Stable

UK-based Vodafone is one of the largest wireless phone companies in the world - and it's successfully transitioning to a diversified operator offering converged mobile and fixed-line services in many markets, argues senior analyst Allan Nichols. In fact, Vodafone recently closed its merger with Idea Cellular in India, creating the largest wireless operator there; the combined network covers 92 per cent of the country's population.

"We are excited for the closing of the merger," notes Nichols. "Besides the increased scale and coverage of the combined company it provides lots of opportunities for cost savings as duplication in some regions and staff in some areas are reduced, and nationwide marketing becomes more efficient as almost all regions are now reachable by the combined network."

Morningstar assigns Vodafone a narrow economic moat, thanks to its cost advantages and efficient scale.

Credit Suisse Group AG CS
Discount to Fair Value Estimate: -35%
Economic Moat: Narrow
Moat Trend: Stable

Global wealth manager and investment bank Credit Suisse is based in Switzerland, where it's one of the two dominant retail and commercial banks.

"We have consistently made a case for Credit Suisse as the 'poor man's UBS,'" explains analyst Johann Scholtz. "We believe it offers many of the same qualities as UBS at a discounted value. For the second quarter running, Credit Suisse delivered a stronger set of results than UBS."

Credit Suisse generates most of its earnings in stable and low-risk private banking/wealth management and Swiss commercial banking. Profitability of its core business comfortably exceeds its cost of capital, adds Scholtz. And its wealth management business earns a narrow moat, with intangible assets and switching costs as the primary moat sources.

Bayerische Motoren Werke AG BMWYY
Discount to Fair Value Estimate: -30%
Economic Moat: Narrow
Moat Trend: Negative

Germany's BMW group is one of the world's leading light-vehicle manufacturers, and it also produces BMW motorcycles and provides financial services. Morningstar assigns a narrow moat rating to BMW, thanks to the firm's globally recognised brands, leadership in powertrain technology, and premium pricing, explains senior analyst Richard Hilgert. BMW continues to outperform the overall car market in the face of global economic uncertainties.

Yet despite the company's solid performance, its shares trade about 30 per cent below what we think they're worth.

"We think BMW's stock has been overly discounted on concerns regarding an escalation in tariffs, the diesel antitrust investigation, the US demand cycle, and a shift to lower-priced, locally produced vehicles in the Chinese market," explains Hilgert. He calls the stock "compelling" at current levels.

 

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Susan Dziubinski is a columnist with Morningstar US. She does not own shares in any of the securities mentioned above

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