From an airport operator in Mexico to a newspaper publisher in Canada, several advisors chose non-U.S. stocks as their favorite ideas for 2018 in MoneyShow's 35th annual Top Stock Picks report. Three China-based stocks also made the list, as did a trio of exchange-traded funds offering diversification across emerging and international markets.
Matthew Castel, Logos LP Blog
Grupo Aeroportuario del Sureste SAB de CV ADR (ASR) was hit hard in 2017 and presents an interesting opportunity. Hurricanes Harvey and Maria had a serious impact on the Mexican airport operator, causing a decline of more than 20% despite year-over-year double-digit passenger growth and increased revenue and operating profit.
The company grew operating profit and earnings per share by 34.01% and 20.06% in the latest quarter, respectively, despite trading at an only 17.8 times forward PE.
The company continues to grow revenues at double digits and operating margins are now at 52.1%, which is near an all-time high and almost a 20% increase over 10 years.
Capex as a percentage of operating cash flow has decreased by nearly 20% since 2009, meaning the company is spending less on capex while keeping profit margins high, which are very positive for future ROIC (return on invested capital) rates.
Although the company had some labor trouble after the acquisition of the Colombian airports, it continues to make strategic investments in the region (increased its interest in San Juan) while making its crown jewel (the Cancun airport) more efficient.
Overall, small-cap companies with high rates of earnings and revenue growth in addition to growing ROIC through margin (net) expansion -- as is the case in Grupo Aeroportuario del Sureste -- are our ideal stocks for 2018.
Gordon Pape, The Income Investor
Nobody wants to invest in newspapers. So it's not surprising that Torstar Inc. (Toronto: TS.B; OTC: (TORSF) ), which publishes Canada's largest circulation newspaper, The Toronto Star, has been a market disaster in recent years.
In 2014, the shares traded for more than C$8 in Toronto. As I write, they are at C$1.60 and showing no signs of recovery.
The latest quarterly results showed more losses, despite stringent cost-cutting. But there are some interesting things happening behind the scenes.
Fairfax Financial, run by a canny investor named Prem Watsa who has been called the Warren Buffett of Canada, recently spent C$11.8 million to increase its holding of Torstar's non-voting shares to 40.6%.
Meantime, Torstar has been doing deals with another troubled media giant, Postmedia Network, which some think may be the precursor to a merger. Despite recent losses, Torstar has more than C$60 million in cash and no bank indebtedness.
The stock continues to pay a small quarterly dividend of $0.025, to yield 6.25%. This stock could conceivably go to zero.
But if Fairfax successfully applies its turnaround skills (it says it will consult with management even if it only owns non-voting shares) and/or a deal emerges with Postmedia to combine their most valuable assets and shed the rest, this stock could be a big surprise.
Timothy Lutts, Cabot Stock of the Week
GDS Holdings (GDS) is a Chinese company in the data center business; its carrier-neutral, cloud-neutral facilities allow connections to all major Chinese telecommunications carriers and to many financial services companies and large enterprises.
Founded in 2001 as a business continuity and disaster recovery vendor, GDS relied initially on third-party data centers, but in 2009, the company started building big data centers of its own in key locations and courting users who needed substantial capacity and power.
In 2011, GDS established new data centers in Kunshan, Chengdu and Shanghai, followed by its first Shenzhen data center in 2014 and two new centers in Beijing and Shanghai in 2015.
In 2016, GDS powered up four new data centers -- and came public on the Nasdaq. But all this growth has not translated into earnings -- not yet.
The company enjoyed revenue growth of 47% in 2015, 42% in 2016 and 56%, 40% and 43% (to $64 million) in the first three quarters of 2017, respectively.
But the price of building data centers is enormous, and while adjusted EBITDA was up over 70% in Q3, nobody expects GDS to turn profitable anytime soon.
The focus here is growth; the profits will come later. That's the same way management at a little company named Amazon (AMZN) thought.
Clients today include major players like Alibaba (BABA) and Tencent Holdings (TCEHY) , and the company expects to start hosting cloud platform and traditional search business for Baidu (BIDU) in the fourth quarter.
Download MoneyShow's 35th Annual Top Picks Report: The 100 Best Stocks for 2018
As to the stock, GDS Holdings came public at $10 a little over a year ago and doubled by the end of 2017. But very few U.S. investors even know its name and to me, that spells untapped buying power.
As long as it's growing this fast, GDS Holdings will never be cheap, but I don't mind that. I'll take fast growth over value any day. The stock is my top idea for speculators for the coming year.
Paul Goodwin, Cabot Emerging Markets Investor
There aren't many genuinely conservative picks among Chinese stocks, but Autohome (ATHM) is my best guess about a beaten-down company with excellent credentials.
China is the biggest, fastest-growing automobile market in the world, and Autohome, my top conservative pick for 2018, is the most important website for getting buyers and sellers together.
The company's Autohome Mall is a virtual extension of dealers' showrooms, a place where car shoppers can browse through a ton of information about cars, specifications, pictures, reviews and consumer feedback.
The site also facilitates the onerous Chinese registration process and puts buyers in touch with financing companies, insurers and dealers. Dealers rely on Autohome to help build their online presence and supply leads to interested buyers.
Autohome gets revenue from design and hosting services, advertising, marketing services and commissions on sales. Revenue was up 62% in 2016 and analysts are expecting 21% earnings growth in 2018.
Autohome ran from $25 to $68 from January 2017 through August, and then fell to as low as $53 in early December. The stock then broke out of a four-and-a-half month consolidation on the first trading day of 2018 and hasn't stopped yet. Momentum is impressive. We rate the stock a buy.
Scott Chan, Brain Trust Profits
TAL Education (TAL) is a leading private tutoring company that prepares students for grueling exams and benefits from an education arms race in China.
In a highly competitive Chinese job market, a degree from a prestigious university could make a major difference in a graduate's career path.
To have a chance at competitive Chinese universities, a student must take and perform well at the annual National College Entrance Examination (known as "gaokao" in Chinese). To enter high school, middle-school students also need to take another exam.
The gaokao is considered to be the most difficult exam in the world. Only about 60% of exam takers pass. A far smaller percentage make it into a top university -- in 2016, fewer than 1 in 1,340 candidates who took the gaokao gained acceptance. It's not uncommon for students to spend their entire senior year preparing.
As China's population becomes more affluent and the middle class expands, parents are spending more money to get their kids as much academic help as possible. To capitalize on China's robust demand for tutoring, TAL has been adding learning centers and online classes at a rapid pace.
Revenue growth has averaged 51% in the last three years. Free cash flow (FCF) nearly doubled in fiscal 2017 and is projected to surpass $300 million in the current fiscal year (to end in February 2018).
Earnings per share growth is a little more erratic due to growth spending but increased 63% last year to $0.23. By 2019, EPS could surpass $0.60 a share and FCF should at least eclipse $500 million.
Despite the already rapid growth in recent years, there is still plenty of unmet demand for tutoring. In the last reported quarter, student enrollment more than doubled year-over-year.
The company has increased the number of learning centers from 507 to 575 through the first two quarters of 2017 and expanded its physical presence from 30 to 36 cities. Within three years, TAL could reach 1,000 learning centers. The company also is expanding its online presence.
Although still less than 10% of overall revenues, online revenue in the latest reported quarter grew by 144% and is an increasingly important part of TAL Education's growth. Look for the stock to achieve average per-share earnings growth of at least 30% annually for the next three to five years.
Benj Gallander, Contra the Heard
This drilling company, our top growth pick for 2018, almost died during the energy price swoon. Cathedral Energy (Toronto: CET; OTC: (CETEF) ) traded north of $15 and dropped to the 30 penny level in 2015.
The major slowdown in the energy sector dropped revenues precipitously from about $275 million to $81 million. That hurt the bottom line where red ink became the flavor of the day.
But management worked with the bank and while Cathedral had to make concessions and do some deal-making, the company has knocked debt down from more than $56 million to less than $1 million.
Revenues jumped in the third quarter to $36 million, up 85 percent from the quarter a year earlier. That pushed the number up 106 percent year-to-date. That turned the bottom line profitable with earnings approaching $2 million.
Though a Canadian company based in Calgary, Cathedral does much of its work in the United States. Some of their equipment is quite specialized, which helps to distinguish this enterprise from others in the sector.
The billionaire Wilks brothers from Texas have been major investors in this company. Often their purchase of shares in companies precedes excellent price appreciation.
Cathedral is poised for growth as it has been demonstrating over the past year. Of course, future expansion largely depends on how things go in the oil and gas patch. Certainly, prices around where they are now will help. But even if they drop, the stock has positioned itself to do well in a more difficult market.
Matt Kerkhoff, Dow Theory Letters
One of the most important things to understand about this current bull market is that it is international in scope. This is not a U.S. story; it's a global one -- so regardless of what happens here in the States, the global economic backdrop remains healthy and positive.
Over the last couple of years, we've seen the global economy pull back from the deflationary abyss, and begin a new cyclical upturn. Interest rates are finally beginning to rise and central banks are beginning to walk back their hyper-accommodative monetary policies.
We're still in the early phases of this, to be sure, but this is a powerful signal that suggests a global recovery is in the works.
The year 2018 is projected to see the fewest countries in recession ever, and that bodes very well for the global outlook. Whenever one country's economy is doing well, their trading partners tend to benefit.
As more and more countries enter a sustained period of economic expansion, it leads to the creation of a virtuous cycle that tends to lift asset prices across the board.
Not only are most economies around the world in relatively good shape, leading economic indicators for just about all countries are also pointing up. This means that we're likely to see continued improvement during 2018, which will grow the economic pie larger for everyone.
As a result, we believe that a position in the MSCI All Country World Index ETF (ACWI) will do very well during 2018.
Diversifying your investments across many countries will allow you to participate in the global economic recovery while not being exposed to too much risk within one particular country or market.
David Dierking, ETF Focus
At a macro level, I'm looking for value to retake the lead from growth in 2018. All of the stars aligned for both growth and momentum to do very well this year -- low interest rates, strong earnings growth and a favorable tax reform impact.
As the Fed continues raising interest rates in 2018, however, investors should be less inclined to pay rich multiples for stocks and begin seeking out bargains instead.
Following that theme, my top pick for 2018 is the WisdomTree Emerging Markets High Dividend ETF (DEM) . Emerging markets had a great year in 2017, but valuations still look attractive and I think there's more upside left.
Large-cap dividend payers, such as the ones held in this ETF, have underperformed relative to their more growth-oriented counterparts and currently present some of the more appealing opportunities in 2018.
The fund -- whose top names include Gazprom (OGZPY) , China Mobile (CHL) and China Construction Bank (CICHY) -- offers a nearly 4% dividend yield and trades at just 9 times forward earnings.
Vivian Lewis, Global Investing
My Top Pick for conservative investors for 2018 is Templeton Emerging Markets Income Fund (TEI) , a closed-end yield fund that pays monthly distributions and has $630 million under management.
The fund is actively managed by a team of experienced bond hands. If you buy a fund or ETF invested in U.S. Treasury inflation bonds, you don't need active managers. This is not the case for emerging market bonds, where skilled management is needed.
Its top-10 holdings include 9.4% in two Zambian government bonds yielding 8.97% and 5.37%, respectively; 5.1% in Kenyan government bonds yielding 6.875%; 4.8% in Senegalese ones yielding 6.25%.
Its largest non-African position accounts for 4.1% of its assets, in Iraqi 5.8% bonds, followed by 3.5% in Argentinian bonds yielding 15.5%. Its top 10 positions account for 36.44% of its portfolio.
The fund is also heavily invested in the private sector although its top holding is a government bond, the Philippine Republic 4.2% of 2024 which accounts for 2.9% of the total holdings. Its second and third largest holdings, both at 2.1%, are private sector debts from Malaysia and India.
Other top-10 holdings include four more private companies (half Latin American) and more government bonds from Panama, the 4% of 2024 at 2.1%; the Republic of Chile 23.125% of 2026; and the Indian Ex-Im Bank floaters of 2023 at 1.8%.
TEI trades at a 12.35% discount from net asset value. As such, investors can buy $100 of bonds for only $87.50. It cannot issue new shares without a complicated process. Its Morningstar rating is 5 stars for 5-year and 10-year performance.
To make sure that a reversal in earnings will not hurt the fund, it retains part of the earnings of its bonds until the end of the year when they are distributed to shareholders. This makes its yield look bad until the end of the year, 2.31% vs. a real yield of 3.06%, all of it from capital gains or interest.
Year to date, Templeton Emerging Markets Income Fund has paid out 10.3% in dividends based on its market price, and 13.4% based on its net asset value. I recently added this closed-end fund to my portfolio, paying $11.65 per share.