Safe bets: 10 world-class foreign blue chips

By Jim Jubak

Looking for that elusive combination of better-than-average safety and better-than- average returns? Try a new generation of emerging global blue chips.

They're growing faster than U.S. blue chips, and they're safer than you might think.

Over the next decade you can significantly beat the returns from U.S.-based blue chips by investing in the shares of global blue chips such as Samsung Electronics (SSNLF, news, msgs) and steel-pipe maker Tenaris (TS, news, msgs). In this column, I'll give you the names of five established global blue chips and five emerging blue chips that are overlooked by most investors in the developed world.

Let me explain why stocks like these will outperform over the next decade.

U.S. investors have long bought familiar U.S.-based blue chips such as PepsiCo (PEP, news, msgs), Johnson & Johnson (JNJ, news, msgs) and American International Group (AIG, news, msgs) because their history of delivering steady 8%-to-12% earnings growth year in and year out gives them a good chance of beating the stock-market indexes, with very low risk. For example, PepsiCo's shares have climbed at an average annual rate of 10.7% over the past 10 years and Johnson & Johnson's at 11.6%. Both returns are well above the 6.8% average annual return of the Standard & Poor's 500 Index ($INX) over that period.

Those are great market-beating returns. But not as great as they could be for three reasons:

• Because these U.S.-based blue chips are so familiar, they aren't especially cheap. They're so well-known that they're a fixture of individual investors in the United States and of institutional portfolios at insurance companies, pension funds and banks around the world.
• Because U.S.-based blue chips don't call the fastest-growing part of the global economy home, their growth inevitably lags. While these global companies are exposed to the fastest-growing parts of the world economy, they still get most of their sales from the slower-growing, if bigger, economies of the United States, Europe and Japan. With that geographic distribution of sales, these companies can't take full advantage of the phenomenal growth rates of China, India and the rest of the developing world.
• Finally, because they don't call these developing markets home, as great as these companies are at keeping their fingers on the pulse of the market, they are playing on unfamiliar turf. To develop and market successful products, they've got to learn to think in cultures that are profoundly different from their own. It's not just chance that Korean mobile phones and Korean software for mobile phones are way cooler in China than competing products from Motorola (MOT, news, msgs) and Nokia (NOK, news, msgs), for example.

The familiarity factor alone gives investors in the shares of global blue chips an edge over investors who own only their U.S.-based peers. For example, Samsung Electronics has emerged as a global blue chip in wireless phones, televisions and chips. Yet it sells for a trailing 12-month price-earnings ratio of just 12.5 versus a P/E ratio of 24.3 for Intel (INTC, news, msgs) and 14.5 for Motorola. I know it's difficult to compare returns on equity across national borders (and national accounting standards), but still the differences here are hard to ignore: Samsung's return on equity, according to Daewoo Securities, was 18.7% in 2006. Intel's was 13.8% and Motorola's 19.3%.

Growth rates skew the equations

Factor in superior growth rates for blue chips in faster-growing global markets, and global blue chips are often cheaper, even when they sell for a higher P/E ratio. Shares of Anheuser-Busch (BUD, news, msgs) trade at a trailing P/E ratio of 20, cheaper than the 22.7 P/E ratio of Grupo Modelo (GPMCY, news, msgs), a Mexican beverage company that owns the Corona brand. But factor in Grupo Modelo's faster growth rate, and the picture reverses: With a P/E-to-growth (PEG) ratio of 1.22 versus the 1.45 PEG ratio for Anheuser-Busch, an investor is buying growth at Grupo Modelo for a 19% discount to the price of growth at Anheuser-Busch.

For these reasons, global blue chips such as these five deserve consideration for your portfolio:

• Samsung Electronics
• Tenaris
• Iron and nickel giant Companhia Vale do Rio Doce (RIO, news, msgs)
• Cement maker Cemex (CX, news, msgs)
• Pulp and fiber producer Aracruz Cellulose (ARA, news, msgs)

They'll be among the stocks I consider when I conduct by annual revision of my "50 best stocks in the world" portfolio in September. (Meanwhile, click here to see my 10 new "buy-rated" stocks in the existing portfolio. The 50-best portfolio is roughly 1 percentage point ahead of the S&P 500 Index since my Sept. 19, 2006, revision.)

For more on this generation of emerged global blue chips, read Antoine van Agtmael's book "The Emerging Markets Century," published this year. U.S.-based investors who often have trouble finding solid information about anything but the largest foreign stocks will find the detail they need to get comfortable with some of these names in van Agtmael's book.

Look for companies as they leave home

If you want higher returns with the same degree of safety, dig a level deeper to find companies that belong to the emerging generation of global blue chips. These are companies that haven't yet made it onto the global stage or onto the radar screens of investors from developed economies.

I'd characterize them as dominant companies, often No. 1, in their own national markets. Many of these companies have so dominated their own national markets that they have little room for more growth at home, so they've left the shelter of their home markets to become dominant players in regional markets. These companies are still working at digesting the results of that move from national to regional player, but they are far enough down that road that investors can be reasonably certain these companies have what it takes for the transition onto the global stage.

A company's choice: Play it safe or not?

San Miguel (SMGBY, news, msgs) is a prototypical new-generation blue chip. A decade ago, the company dominated its national market with a 90% share of the Philippine beer market, 85% of the Philippine soft-drink market and 70% of the Philippine processed-meat market.

Taking more share at home at these levels is just about impossible, so the company faced a stark choice: Play it safe by staying at home and growing at the growth rate of the Philippine economy or take the risk of becoming a regional player.

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