3 Cheap International Stocks to Buy

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Companies in the United States are generating more of their revenue from outside the U.S. than ever before. In fact, new research from Morningstar Indexes estimates that 39% of the revenue of the companies in its broad U.S. market index is generated outside of the United States. That may leave stock investors wondering why they’d want to buy international stocks, given that so many U.S. companies have ample exposure to global growth.

Limiting your search for compelling investments to U.S. companies only limits your opportunity set. Granted, international stocks carry currency risk, and, especially in emerging markets, they carry geopolitical risk, too. But for patient investors with long enough time horizons, international stocks can be compelling opportunities.

Today we’re taking a look at three undervalued international stocks from the Morningstar Global ex-US Moat Focus Index. The index includes 50 wide- and narrow-moat stocks with the lowest price/fair value estimates. These stocks are good choices for investors who want exposure to non-U.S. companies with solid competitive advantages at a cheap price.

3 Cheap International Stocks to Buy

1. Tencent TCEHY
2. Bayer BAYRY
3. Millicom International Cellular TIGO

The first stock on our list of undervalued international stocks is Tencent. Tencent runs China’s largest social media app. Tencent is also the world’s largest video game vendor and is among the world’s largest venture capital and investment firms. Given its massive user base and its related network effects, we think the company has carved out a wide economic moat—that means we expect the company to remain competitive for at least two decades. We forecast Tencent to record a five-year adjusted earnings compound annual growth rate of 17%. We think the stock is worth $90, and it trades significantly below that.

The next name on our list of undervalued international stocks is Bayer. Bayer is a German conglomerate. Its healthcare segment provides close to half of its sales and includes pharmaceutical drugs as well as vitamins and other consumer healthcare products, most notably, the Aleve and Aspirin brands. The firm’s crop sciences business includes seeds and pesticides. Bayer significantly expanded its competitive position in the field with the acquisition of Monsanto. However, the acquisition also increased Bayer’s exposure to litigation around potential side effects of glyphosate, which is the active ingredient in Roundup. We think the company has carved out a wide economic moat in both businesses, and we expect a 4% five-year compound annual growth rate for sales. We think shares are significantly undervalued and worth $22.50 each.

The final cheap but quality international stock we’ll cover today is Millicom International Cellular. Millicom is a collection of telecom businesses serving nine countries in Latin America. We think the company has carved out a narrow economic moat thanks to its cost advantages and scale. While economic and political challenges in some of its markets have hurt recent results, we expect that ongoing smartphone and broadband adoption will lead to solid growth and cash flow in the coming years. We expect revenue to grow 3% annually during the next five years. We value the stock at $30 but shares trade well below that.

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Watch “3 Cheap Dividend Stocks to Buy With Growth Potential” for more from Susan Dziubinski.

Morningstar sector directors Damien Conover and Mike Hodel, senior analyst Ivan Su, and Morningstar Indexes strategist Dan Lefkovitz provided the research behind this segment.

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