By Jennifer Yousfi
Global investors seeking undervalued markets might want to look at Russia, China, India, Malaysia, South Korea or Brazil.
And if they want to avoid overvalued markets, they'd be best to eschew Italy, the United States, Japan, Canada, Switzerland, or Germany.
What's tipping us off?
The so-called Price/Earnings-to- Growth ratio, better known to investors as the "PEG" ratio.
Let me explain …
One of the most popular stock valuations is the Price/Earnings (P/E) ratio. If you take that calculation one step further and include a stock's expected growth rate you hit on the P/E-to-growth ratio, or PEG ratio.
Analysts have been using PEG ratios for years, now, to pick undervalued stocks, but now you also can use that same ratio to determine which countries are trading at good value.
A recent Bespoke Investment Group report used the popular PEG ratio to identify which country's stocks are currently undervalued.
"Late last year, we began performing this analysis on countries to get a better comparison of the valuations of both developed and emerging markets," the B.I.G. Tips report read. "To do this, we divide the country's [gross domestic product] growth estimate into the estimated P/E ratio of its major stock market index."
Like an individual security's PEG ratio, the lower the ratio, the more undervalued the stock.
The top-three spots on that list go to Russia (1.37), China (1.91) and India (2.06). Brazil clocks in at sixth with 2.80. Money Morning readers may recognize them as member of the "BRIC" nations – a term coined by Goldman Sachs Group Inc. (GS) in 2003 identifying rapidly growing emerging economies (Brazil, Russia, India, China). [For a complete listing of the PEG ratios of the respective countries, please see the chart below.]
Rounding out the top six are Malaysia (2.37) and South Korea (2.66), the latter of which is another investing favorite of both Money Morning and Warren Buffett, chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B).
The United States, on the other hand, comes in near the bottom with an estimated PEG ratio for 2008 of 11.39.
When using the calculations to make investment picks, it's important to remember that both the P/E ratio and the 2008 GDP growth are only estimates. Still, it's easy to see how fast-growing economies have the leg up on more mature markets such as Japan and the United States.
How to Play the PEG for Profits
One of the easiest ways for U.S. investors to cash in on a foreign country's expected stock market growth is with an American-listed exchange-traded fund (ETF) or exchange-traded note (ETN) that mirrors a foreign stock market index.
If you prefer to stick to individual securities:
Russia: OAO Gazprom (OTC: OGZPY), the state-owned natural gas monopoly with ambitions to control Western Europe's gas supplies.
Lukoil (OTC: LUKOY), the other obvious Russian heavyweight, is the largest state-controlled oil company.
China: A terrific way to play China is with the Region Opportunity Fund (USCOX), a mutual fund run by San Antonio-based U.S. Global Investors Inc. (GROW). Indeed, U.S. Global, itself, is a pretty good play on international growth. It manages some of the best emerging-market funds, and natural-resources funds, in the business. As global growth fuels global investments – and it will – U.S. global will see more money pour into its funds, boosting the management fees it collects, as well as its profits and stock price.
India: One of India's titans is Tata Motors Ltd. (TTM), which recently sealed both ends of the consumer automotive spectrum with its forthcoming $2,500 Nano and its recent $2.3 billion acquisition of the Jaguar and Land Rover brands.
Another is option could be the pharmaceutical company Dr. Reddy's Laboratories Ltd. (RDY). As many U.S. pharmaceutical patents expire in the next five years, this major generic-drugs manufacturer can expect to benefit.
South Korea: Back in October 2007, Buffett took a 4% stake in this country's Number One steelmaker, POSCO Ltd. (PKX). Studies have shown that following Buffett's investment moves, even months after the fact can be the pathway to profits.
Brazil: Companhia Vale do Rio Doce, now referred to only as Vale (RIO), is an iron-ore company with ancillary operations in gold, nickel, copper and other metals. It's one of the true global blue chips, with a market capitalization of almost $200 billion.
Another Brazilian firm worth a look is Petrobras (PBR). It's one of the few emerging market oil companies with access to modern technology – and the willingness to work with the oil majors.
News and Related Story Links:
- Money Morning:
Is Brazil "Investment Grade" for Investor's Money, Too?
- Money Morning:
Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO
- Money Morning:
Investors Leaving India's Market Aren't Thinking Long-Term
- Money Morning:
Country Estimated 2008 PEG Ratios
FTSE/JSE Top 40
Source: Bespoke Investment Group