In How to Buy Stocks Listed on Foreign Exchanges I described how I go about purchasing shares of companies not trading on American exchanges. That brings up the question of how to research these companies.
After all, you need to know about a company and want to own it before executing the trade.
I’ll explain my answer to that question in just a moment. And I’ll say upfront that my answer is one that may prove less than satisfactory to many.
Exactly why will emerge in the following paragraphs.
But let me offer a few caveats before getting started:
First, this post deals with researching foreign (non-US) stocks that trade only on foreign exchanges. Finding information on foreign companies listing on the NYSE is as easy as getting info on the American-based firms that do so. The same is true for many foreign companies on NASDAQ. So this discussion isn’t aimed at those particular foreign stocks.
Second, like my post on buying stocks on foreign exchanges, this is most relevant to individual investors. And for generally the same reasons. Professional money managers and industry insiders reading this blog have analysts or even entire departments devoted to researching these stocks. Or at a minimum, pay big bucks to research services providing this information.
And third, my method for researching these stocks is what works for me and nothing more. You may have a better way of evaluating these companies or accessing such information. If so, great. Just be aware that what works for me may not be suited to your needs.
So here’s what I do. Note that all these have a bit of overlap involved.
Read, Read and Read Some More
That’s critically important for investing in general -- Warren Buffett recently told Charlie Rose during an interview that most of his job involves reading periodicals and annual reports -- and even more so with foreign firms.
When you make a habit of reading, you build a knowledge base to work from. Often without realizing it at the time. You never know when something you read today plants the seed that grows into a payoff tomorrow. Or even several years from now.
I first read about 3i Group in a Financial Times story on the company going public in the 1990s. It became sort of a go-go stock during the tech boom. Then I became aware it was a value stock when Meryl Witmer of Eagle Capital Partners recommended it in a Barron’s Roundtable in January 2005. Regular readers know I bought 3i Group later and it has been a significant contributor to my portfolio.
That’s a method popularized by professional money manager and author John Train. He wrote about it as a way of saving time researching companies by piggybacking on the holdings of top money managers.
Basically, you look at the reported stock holdings of a couple of investment managers you admire. See what they’re buying and begin your research from there. Note I say “begin” -- don’t buy any stock simply because someone owns it.
Use this information as a starting point.
When I saw Marty Whitman, Peter Cundill, Mason Hawkins and the guys from Tweedy Browne all start buying Japanese stocks in the mid-to-late 1990s, I knew there must be a lot of cheap stocks in the country. So that gave me the foundation to work from. They all loved the property and casualty insurers, but there wasn’t a lot of duplication across their portfolios otherwise.
You see, you still have to make up your own mind on which stocks to buy using reverse engineering. After all, your portfolio is your portfolio -- and you have to be the one doing the picking and choosing on what goes in it.
Still, when you discover that top-notch value players are backing up the truck and buying in, say, Japan or the UK, you can avoid wasting time looking for bargains in Germany or Argentina.
So reverse engineering can be a valuable tool in your bargain-hunting arsenal. And here’s something else: every professional money manager worth his or her salt does the exact same thing. They all look at each other’s holdings.
Fortunately, the internet makes researching non-US companies much, much easier. And that’s especially true once you’ve got a list of portfolio candidates.
Almost every company now has an English language version of its website, with balance sheet and other financial information. I’m writing this in English, you’re reading it, and that means you read English. The fact that English is the international language of commerce is a huge advantage for us.
That said, foreign company websites -- like those of American firms -- run the gamut from excellent to awful. You’ve also got to take into account that many foreign companies do not present financial data meeting US GAAP accounting standards, and do not file reports as frequently as you might wish. And you’ve got to remember that many foreign managements couldn’t care less about their shareholders.
This may be politically incorrect, but what I’m about to say is generally true. Shareholders get much better treatment in the “Anglo-Saxon” countries -- the UK, Ireland, Canada, Australia, New Zealand and the US. That’s not true in every case, of course. And investing in individual companies is about specific companies, after all. Factor this into your buying decisions.
Google searches can uncover goldmines of information on foreign companies. I do standard web searches and news searches. Again, the quality of what’s found varies widely.
Overlapping from my above emphasis on reading, search for information on WSJ.com, Barrons Online and FT.com. I’ve also found good data and background from Bloomberg and Reuters.
My broker, Charles Schwab, provides good reports and research on companies listed on American exchanges, but very little on firms traded exclusively on foreign exchanges. If you buy foreign stocks through a full service broker like Merrill Lynch, chances are you can get research from them. I don’t know so be sure to ask.
I have purchased research reports on foreign firms in the past. You can find these from Reuters and others through WSJ.com, FT.com and Yahoo! Finance as well as Reuters itself. I’ve paid US$10 to $25 for this information on specific companies, though I haven’t done this often. You can almost always find what you need somewhere on the web for free, as long as you’re willing to spend enough time looking.
Well, that’s it. That’s how I research foreign stocks not trading on American exchanges. It is not as easy as obtaining information on foreign companies listing in the US -- and that’s why I stated at the outset of this article my answer may be less than satisfactory. But it’s much easier thanks to the internet. And will continue getting easier over time.