How to research foreign stocks

Recently most of my postings have been about foreign stocks, and for the near future this trend will probably continue. Most investors have a strong home country bias where they invest an irrationally large portion of their assets in the country from which they're from. Part of this bias is due to investors feeling comfortable with what they know. While there are undeniable advantages to investing close to home there also shouldn't be a fear of investing abroad either.

As I've researched foreign companies I've developed a bit of a process which will hopefully be useful to other investors as well. I feel like the best way to describe my process is through the use of an example. Most recently I've been researching stocks in Portugal, so this will be a case study of investigating a Portuguese stock, but these steps apply to any country.

Finding the stock

There are two approaches, the first is to screen for companies. To screen for stocks in Portugal one could use screener.co or use the FT.com global screener. Both screeners can limit by markets.

I took a different approach, I went to the Lisbon Euronext website and went one by one looking for profitable Portuguese companies, I found one worth considering Brisa. I took this approach because Portugal has 50 stocks listed on the Lisbon exchange, a small enough list to dig through one by one.

Finding general information

After identifying a company the first thing I want to find out is what line of business they're in, and any recent news events. Reading recent news about a company is a great way to familiarize myself with what the company is involved with, and what issues they're currently dealing with. Unfortunately in most cases it's very hard to find information in local papers if you don't speak the language. The best resource I've found is using the Reuters Key Developments tab for the issue I'm researching.

Both Reuters and FT.com usually have a good paragraph or two about the company and the industry they're involved in. For Brisa FT states:

Brisa Auto Estradas de Portugal SA (Brisa) is a Portugal-based holding company engaged in the construction, maintenance and operation of highways. The Company also provides services associated to road safety and driving assistant both in highways and urban environments. Brisa holds six road concessions in Portugal, namely Brisa, Atlantico, Brisal, Douro Litoral, Baixo Tejo and Litoral Oeste, comprising a total of 23 highways and covering 1,705 kilometers. Abroad, Brisa is present in the United States, controlling the Northwest Parkway concession; it operates in Brazil through CCR that holds seven road concessions (1,571 kilometers) and an underground railway concession; it also operates in the Netherlands, where it is active in electronic toll systems. As of December 31, 2009.The Company's wholly owned subsidiaries include Brisa Internacional SGPS SA, Brisa Finance BV, Brisa Servicos Viarios SGPS SA and Via Oeste SGPS SA, among others.
After reading some general summary information I try to visit the company's website. I have made the observation that if a company is located in a dominant European country (France, Germany, Italy, Spain) it's likely the website will be in the native language only. On the other hand if the company is located in a smaller European country in most cases the website will also be provided in English. In the case of Brisa they offer an English version of the website. I'll usually take a chance to surf the website and read how the company describes their own business.

Digging into the financials

Now that I'm acquainted with what Brisa does, and where they operate I want to take a look at the financials and see if this is an investment I'd consider for my portfolio.

The first source I want to investigate is any financial reports and presentations listed on the company's website. In Brisa's case they have a lot of investor information available.

In the United States most investors are used to companies reporting results quarterly, as well as reporting material events as often as they happen. This level of transparency is quite rare in the investing world, in Europe all companies report annually, and some report half year results. Brisa is a larger company and actually reports quarterly, all of the reports for the last year can be found here.

If a company doesn't publish English language reports on their website a second place I look is the local securities commission. In Portugal it's called Comissao do Mercado de Valores Mobiliaries or CMVM. I searched for Brisa, and ended on the page contained all of their reports to the commission.

Another resource for getting a nice general overview of the company financials is the detailed statements page of FT.com. FT.com also has summary level data for the past few years of statements.

Financial statement oddities

Once I find the financial statements the first thing I do is read the annual report. The annual report contains great background information that's essential to understanding any subsequent reports. I feel that reading the annual report is preferred to jumping straight to the financial statements.

Most investors will find IFRS statements fairly normal to read, but there are some real differences between IFRS and GAAP. Some of the big items:
  • IFRS is principles based where as GAAP is rules based. 
  • Criteria to recognize revenue is different. 
  • Differences in inventory accounting (GAAP allows LIFO and FIFO, IFRS only FIFO) 
  • Differences in how items are classified on the cash flow statement. 

Tying it all together

I'm not going to walk through how to value Brisa because each investor has different things they look for in an investment but hopefully I've shown how to gather enough information to help an investor feel comfortable venturing beyond their home country. By going global an investor greatly expands their investment universe. There are many gems beyond your borders and in the age of the internet the information is much easier to find than it ever has before.

Talk to Nate about researching foreign stocks.

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