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5 Attractive Foreign Stocks

These names all earn narrow or wide Morningstar Economic Moat Ratings and trade below our fair value estimates.

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The Cannes Film Festival wraps at the end of this week. The 12-day event takes place each year in a small city in France, showcasing films of all genres from around the world. Simply put, the festival celebrates cinema at an international level.

In that same spirit, we decided to celebrate investing globally. Specifically, we wanted to share some worthwhile foreign-stock ideas.

Investing in non-U.S. stocks doesn't have to be unnecessarily daunting. In fact, our recipe for smart investing applies around the globe. First, favor companies with durable competitive advantages, or economic moats. These companies should be able to fend off competition and outearn their costs of capital for years to come. Then, buy these companies when they're trading below what they're worth.

To find some ideas, we decided to ride on the coattails of the Morningstar Global ex-US Moat Focus Index. This quality-focused index is a subset of the Morningstar Global Markets ex-US Index--a broad index representing 97% of developed- (ex-United States) and emerging-markets market capitalization. Morningstar ranks 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.

For this article, we focused on non-U.S. stocks that were recently added to the index as of the latest reconstitution. Five of those newcomers have shares listed on U.S. exchanges (and are therefore easily accessible to U.S. investors) and are undervalued as of this writing.

Data is as of May 20, 2019.

ABB (ABB)
Economic Moat: Wide
Moat Trend: Stable
Uncertainty: Medium
Morningstar Rating: 4 stars

Switzerland's ABB is a global supplier of power and automation products. Its power grids and robotics and motion divisions are better positioned now to capture share in their respective markets than they have been in recent years, suggests Morningstar director Denise Molina. Its power grids division is retooling its salesforce toward representatives who can better address utilities customers' needs with regard to dynamic power allocation. Moreover, the 2017 acquisition of B&R, a top-five global supplier of critical discrete automation components, including programmable logic controllers, fills a void in ABB's product portfolio.

"Because ABB is also the number-two robotic-arm supplier globally, we believe this deal puts it at a competitive advantage relative to suppliers such as  Rockwell Automation (ROK) and  Siemens (SIEGY) that do not manufacture robotic arms," Molina argues.

The company recently announced that CEO Ulrich Spiesshofer is leaving. Molina thinks a management change could be a positive for the company, provided the new CEO has greater vision on Industry 4.0 applications. Some activist investors are also pushing for a divestment of the electrification division.

"While ABB lags on software, it has a base of robotics and automation customers that puts it in a solid position for Industry 4.0. We are maintaining our $25.40 fair value estimate and think the shares look attractive," she concludes.

Alibaba (BABA)
Economic Moat: Wide
Moat Trend: Stable
Uncertainty: High
Morningstar Rating: 4 stars

China's Alibaba is the world's largest online and mobile commerce company, as measured by gross merchandise volume. During the past few years, Alibaba has transitioned from a traditional e-commerce company to a Big Data-centric conglomerate, with transaction data from its marketplaces, financial-services, and logistics businesses allowing it to move into cloud computing, media/entertainment, and online-to-offline services, says Morningstar sector strategist R.J. Hottovy.

"We've long thought that a strong network effect can allow e-commerce players to extend into other growth avenues, and nowhere is that more evident than Alibaba," he posits.

The firm's Internet services affect most Chinese Internet users in some way, providing Alibaba with unsurpassed source data that it can use to help consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase transactions, and bolster return on investment. Its marketplace monetization rates have generally trended upward, observes Hottovy, indicating that sellers are becoming increasingly dependent on Alibaba's marketplaces and payment solutions.

"Retail revenue per active user continues to outpace other China rivals, owing in part to an emphasis on higher-quality merchants," Hottovy says.

Moreover, AliCloud, globalization, digital entertainment, and Ele.me (food delivery) offer long-term potential for the company.

BRP (DOOO)
Economic Moat: Narrow
Moat Trend: Stable
Uncertainty: High
Morningstar Rating: 4 stars

Canada's BRP designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. The company's processes already incorporate lean operations, but management continues to pursue manufacturing and product initiatives to improve the company's competitive positioning, says Morningstar senior analyst Jaime Katz.

"BRP's articulated strategic priorities include growth, agility, and lean focus," she says. "With watercraft and all-terrain vehicle production in Mexico and supply closer to consumer demand, BRP will be able to capture incremental cost savings in its manufacturing processes, in our opinion. In addition, firmwide centers of expertise and excellence should enable BRP to manufacture more optimally, improving its utilization (with incremental capacity stemming from changes at the Juarez 2 plant), and to bring new products to market more quickly, ensuring a continually relevant and in-demand product lineup."

BRP recently moved its 2020 earnings-per-share goal up a year, as it has continued to improve gross margins and leverage selling, general, and administrative expenses on higher demand.

 Enbridge (ENB)
Economic Moat: Wide
Moat Trend: Stable
Uncertainty: Medium
Morningstar Rating: 4 stars

Canada's Enbridge operates crude-oil and natural gas pipelines, including the Canadian Mainline system, and Canada's largest natural gas distribution company. The company is positioned to benefit from growing oil sands supply dynamics with its Mainline system and regional oil sands pipelines, argues Morningstar senior analyst Joe Gemino. He explains:

"The regulated Mainline system generates attractive tolls and represents approximately 70% of Canada's pipeline takeaway capacity. The system offers refinery access to various markets, adding to the network's attractiveness. The company also operates regional pipelines that tie directly into the Mainline. Each of these pipelines originates from existing oil sands projects and is underpinned by long-term contracts. Growth projects possess the same economics, positioning the company to benefit from the growing supply."

Enbridge operates a diverse energy portfolio, too. Its gas distribution operations benefit from regulated returns, providing reliable cash flows. Moreover, the company's natural gas pipelines and processing assets supplement its crude pipeline network.

"We believe the stock is deeply undervalued based on the company's vast growth portfolio, highlighted by the lucrative natural gas projects associated with the Spectra acquisition and the Line 3 Replacement," Gemino concludes. "The recent market sell-off serves as a tremendous buying opportunity for long-term investors."

 HSBC (HSBC)
Economic Moat: Narrow
Moat Trend: Stable
Uncertainty: High
Morningstar Rating: 4 stars

Established in 1865 in Hong Kong, London-based HSBC is one of the largest banks in the world with 38 million customers worldwide. HSBC's strengths are its positions in the United Kingdom and Hong Kong banking systems, as well as its overall leadership role in trade finance, notes Morningstar senior analyst Michael Wu. HSBC has been restructuring during the past few years--exiting unprofitable markets and reducing costs.

"The bank is now poised to reap the benefits of its leaner structure," he notes.

The bank is also shifting emphasis toward Asia because of the area's growing importance in global trade, as well as its increased urbanization and growing middle class. The bank has long had an operational history and investments in China, making it a likely candidate to enjoy economic growth in asset management, Chinese yuan internationalization, and consumer and corporate lending.

"We remain firm on the growth opportunities in the geographies that HSBC is exposed to, particularly in Greater China," Wu concludes.

Disclosure: Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.