Overseas Investing at Home: Screening for Reasonably Priced ADRs

    by John Bajkowski

    Portfolio diversification among different kinds of assets, industries, and securities is a basic principle of sound investing. One tactic to ensure that you are investing in different kinds of securities is to add some degree of exposure abroad—invest 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. 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.

    A screen seeking reasonably priced ADRs is built into Stock Investor Pro, AAII’s fundamental stock screening program and research database. The simple screen looks for companies trading with a low PEG ratio (price-earnings ratio divided by earnings per share growth) and exhibiting strong recent price momentum. The screening criteria used in the program are detailed below.

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