Building a Screen for Reasonably Priced ADRs

by John Bajkowski

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Recent market volatility has helped reinforce the importance of portfolio diversification among different kinds of assets, industries, and securities. One tactic to ensure that you are investing in different kinds of securities is to add some degree of exposure abroad—investing internationally.

Individual investors can easily access the foreign markets via international mutual funds. Direct investment in foreign-traded stocks is difficult and costly for the individual investor. However, if you want to invest in individual stocks, an excellent route overseas is to purchase shares of international companies in the form of American depositary receipts (ADRs). A depositary receipt is a negotiable certificate that is issued by a U.S. commercial bank and represents shares of a non-U.S. publicly traded company. They are priced in U.S. dollars and owners avoid many costs associated with direct foreign investment, such as international settlement, global custody, foreign brokerage, currency conversions and multi-currency accounting. Dividends are also paid out in U.S. dollars.

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This article explores the characteristics of ADR stocks and how a growth-at-a-reasonable-price screen could be applied.

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