NEW YORK ( TheStreet) -- Over the past half-decade, the liquidity-driven bull market has been very generous to shareholders of blue chips such as Exxon Mobil, ( XOM), IBM ( IBM), Wal-Mart ( WMT) and others. But the years ahead, based on demographics, should feature strong growth for foreign small caps such as Adecoagro ( AGRO), Audioboom, InterOil ( IOC) and LiteBulb. Here are three reasons why investors should look to foreign small caps for future gains.
Many of the greatest money managers own foreign small caps as many are excellent stocks.
In addition to being a major shareholder in Exxon Mobil, IBM and Wal-Mart, last October legendary investor Warren Buffett bought Ray-Q Interconnect, an Israeli high tech with about 60 employees (IBM has 431,212, according to Finviz). That is the third Israeli company Buffett has bought. Billionaire hedge fund investor George Soros has done well with foreign small caps such as Adecoagro in farming, and InterOil an energy firm, among many others.
READ MORE: What Wall Street Is Saying Gold Prices Will Do in the Second Half of 2014
Why Apple Has Become a 'Bellwether' for 2014
Demographics Favor Foreign Small Caps
A report from McKinsey & Co., "Winning the $30 Trillion Decathlon," predicts that the great majority of global economic growth will come from emerging market consumers in the future. Small caps like LiteBulb Group, which sells consumer products in over 30 countries, are ideally placed to profit. So are social media firms that have a global appeal such as Audioboom, called the "YouTube of Radio." Adecoagro operates in the South American agricultural sector. InterOil is focused on oil and natural gas production in Papua New Guinea. Rosslyn Data RDT: London punches above its weight class in computer services related to The Cloud.
Foreign Small Caps Offer Much-needed Risk Management Elements
Exxon Mobil, IBM, Wal-Mart and many other American blue chips are great companies that have been great investments. But diversification is always imperative for any investor. Small caps with operations around the world allow for American investors to profit if the U.S. economy should stagnate. With U.S. gross domestic product falling by 2.9% for the first quarter of 2014, that is not just a theoretical concern in portfolio management.
Foreign Stocks Are Also Trading at Reduced Valuations to American Equities
As detailed in a previous article on Three Reasons to Buy Shares Through the London Stock Exchange, foreign stocks are cheaper. The FTSE 100, the British blue chip index, has a much lower price-to-earnings ratio and a much higher dividend yield, on average, than the S&P 500 Index (SPY). Foreign small caps also operate in the industry group as American blue chips, though in a different scale: IBM and Rosslyn Data are in information technology, ExxonMobil and InterOil in energy, and Wal-Mart and LiteBulb Group are in consumer goods. Valuations for every company are unique but foreign small caps can give a presence in a sector at a much lower cost for an investor.
Liquidity is king in any market, but demographics will always rule over the long term.
Foreign small caps like Adecoagra, LiteBulb Group, Audioboom, and others will benefit from that growth in global consumer spending. For investors, that represents the diversity needed to hedge the gains of the past five years from American blue chips. Risk management like that is critical for all investing. Buying foreign small caps makes it rewarding for the long term.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates ADECOAGRO SA as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ADECOAGRO SA (AGRO) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been an overall disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Food Products industry and the overall market, ADECOAGRO SA's return on equity significantly trails that of both the industry average and the S&P 500.
- ADECOAGRO SA reported flat earnings per share in the most recent quarter. The company has reported a trend of declining earnings per share over the past year. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, ADECOAGRO SA swung to a loss, reporting -$0.24 versus $0.11 in the prior year. This year, the market expects an improvement in earnings ($0.48 versus -$0.24).
- AGRO, with its decline in revenue, slightly underperformed the industry average of 3.1%. Since the same quarter one year prior, revenues slightly dropped by 6.2%. Weakness in the company's revenue seems to not be hurting the bottom line, shown by stable earnings per share.
- AGRO's debt-to-equity ratio of 0.96 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.16 is sturdy.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Food Products industry average. The net income increased by 3.0% when compared to the same quarter one year prior, going from $2.51 million to $2.59 million.
- You can view the full analysis from the report here: AGRO Ratings Report