With patriotic feelings running high this November, now is the time to "buy American" -- American stocks.
Even though the greenback may be getting more buying power overseas, one area where you shouldn't be traveling is in your portfolio.
The Fall of Foreign Stocks
Just a year ago, the financial world was playing a markedly different tune. Foreign stocks were where the money was. For some time ADRs and ETFs were popping up left and right on American exchanges, offering investors the chance to put their money in dozens of lucrative regions across the globe.
In an eerie parallel to the "tronics boom" of the 1960s, some unscrupulous companies even started adding "China" to their names to try and cash in on the hype (leading to
In 2007, Latin American funds were the top performers out there while indices measuring the stock markets of scores of developing countries reported gains well into the double-digits. Then the subprime crisis hit.
Suddenly, foreign stocks have lost much of their cachet as investors here in the U.S. are scrambling to make sense of the high valuations they had been giving them. Index ETFs like
iShares FTSE/Xinhua China 25 Index
iShares S&P Latin America 40 Index
are down over 50% and over 40% respectively on the year.
The main reason to stay away from foreign stocks right now is that they're simply too volatile now. While emerging market stocks still have a ton of potential for investors in the future, their near- to mid-term prospects aren't quite as certain.
Even with calamity facing overseas investments, it's being made clear by some of investing's biggest names that now is the time to buy if you want to cash in on the super-low valuations many companies are seeing these days.
The most well known example of this has been the Oracle of Omaha's
New York Times
. In it, Warren Buffett explained, "The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher... So ... I've been buying American stocks."
Buffett believes that most major companies will be setting new record profits in the next couple decades, so the tumbling share prices simply don't make sense. Economist Jeremy Siegel agrees: "I believe that stock prices are now so extraordinarily cheap that I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months."
That's no small claim for an economy in trouble and a stock market that's down substantially in 2008. And now, with President-elect Barack Obama set to take office in January, does it still make sense to buy American stocks? Siegel thinks so. In a
on the economics of politics, Siegel wrote, "Since 1948, Republican Administrations have controlled the White House 57.2 percent of the time. But during the period that the GOP was in office, stock returns have averaged only 9.53 percent per year, while under Democratic administrations, stocks returned 15.25 percent per year, more than five percentage points higher."
The Non-Partisan Look for Value
Regardless of the party in charge, the key word for investors these days is value.
With the unbelievable preponderance of undervalued stocks out there today, watching solid companies with low price-to-book values is a pretty staid way of finding bargains (for more on using book value to find cheap companies, check out "
Besides that, here are a few key elements to look for when you screen for undervalued stocks: decent
, a strong
In today's market, there are
of investment plays that meet that description.
At a glance, a few of my favorite long-term stock investments right now include
Molson Coors Brewing
International Paper looks attractive for a few reasons: The paper and packaging company reported impressive revenue growth in the last quarter, they're trading at price-to-book ratio of 0.7 (well under the industry average of 1.1), and they have a history of delivering a nice dividend to investors.
Molson Coors Brewing is equally attractive (and not just because of a witty ticker symbol). This colossal beer brewer has been aggressively expanding its brand reach, most recently acquiring stakes in brands like Fosters and starting a joint venture with SABMiller. Besides the fact that beer is a great "recession-play," the stock is priced at only 90% of book, and, like International Paper, is a good dividend stock.
SUPERVALU is a grocery chain that also has a thriving supply chain business. One of the most attractive things about SUPERVALU is the financial responsibility undertaken by management. Since 2001, the company's leaders have been diminishing debt and growing sales on a consistent basis. With better-than-industry margins, dividends, and valuation ratios, SVU is one retail grocer that has staying power through a tough economy.
Jonas Elmerraji is the founder and publisher of Growfolio.com, an online business magazine for young investors.