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ADRs: Bring the World of Opportunity to Your Door

02/09/2008 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor, Forecasts & Strategies, Skousen Hedge Fund Trader, Skousen High-Income Alerts, and Skousen Turnaround Trader, moderated a panel of experts whose companies offer their shares to US investors via American Depository Receipts…

Investors may be surprised to learn that more than one-halfof the largest public companies in the world reside outside the US, and US-listed stocks account for just 28% of global equities.

Mutual funds and exchange-traded funds have been the vehicles of choice for international investing and have received the lion’s share of the funds US investors have allocated for overseas investing.

But US investors can also buy stocks of major companies based outside the US through    American Depositary Receipts (ADRs)—shares of foreign companies denominated in US dollars but traded on the major US exchanges and over the counter. Currently, the Bank of New York’s Web site lists more than 2,250 ADRs from more than 70 countries. Their financial statements are subject to US laws and accounting rules, must comply with exchanges’ guidelines and offer familiar trade, clearance, and settlement procedures.

Some of the most widely-held ADRs include: Toyota Motor (Nyse: TM), Honda Motor (Nyse: HMC), Sony (Nyse: SNE), Nokia (Nyse: NOK) and InterContinental Hotels (Nyse: IHG). Investors can also purchase various ETFs composed exclusively of ADRs.

The ADR panel at The World Money Show featured four companies that offer ADRs. Skousen introduced the panel, noting that the natural resources sector has recently experienced the biggest bull market since the beginning of this century.

Jean Marie Young, manager of global retail investor relations for Royal Dutch Shell (Nyse: RDS-B), advised attendees that the demand for energy is rapidly increasing, due to rising populations as well as a higher level of prosperity in regions such as India and China.

She noted that currently 20% of global energy is derived from fossil fuels, while alternative sources, including solar, wind, and biofuels, account for only a small 0.5%, leaving plenty of room for growth. Young stated that Shell is an active investor in many alternative energy technologies. However, in response to moderator Skousen’s question, she told the audience that nuclear technology is an area that is currently not one of them.

Young added that while the industry is going through fundamental changes as a result of this rising demand, it also faces continued challenges such as higher costs and new competitors. The ADRs are down around 20% from their all-time highs.

Lucy Rodriguez, vice president of Mexico’s Cemex (Nyse: CX), told the audience that Cemex’s position as the world’s top concrete producer, third largest cement company and a leader in aggregates should help it gain from increased demand from residential, industrial, and commercial customers globally.

Cemex, founded more than 100 years ago, now has sites in 50 countries. Nearly 30% of its operating earnings comes from its US operations, 25% is from Mexico, and the remainder comes from the rest of the world. One-third of Cemex’s US demand comes from the residential sector in the US, while one-half stems from infrastructure needs. In Mexico, more than 50% of its demand is derived from residential and one-third from infrastructure.

Rodriguez says the company is looking for increasing industrial and commercial demand in the US to offset the residential slowdown. The ADRs are about a third off last year’s all-time high.

Andrew Johnson, investor relations analyst of BHP Billiton (Nyse: BHP), told attendees that his company, headquartered in Melbourne, Australia, is the world’s largest mining company in market capitalization and is widely diversified around the globe.
Johnson discussed his company’s holdings in petroleum and uranium, noting that major volume increases were forecast for petroleum, while BHP owns the largest uranium deposit in the world, ten times the size of its nearest competitor.

Currently, the demand from emerging markets is pushing the company’s growth, with China and India as the principal drivers. For the future, Johnson expects a small drop due to economic slowdowns across the globe, including the US. But he noted that with the seven-to-ten-year lag from discovery to production, prices should remain stable.

Skousen mentioned that BHP has recently formalized its hostile $147-billion bid for Rio Tinto Nyse: RTP), which sent both companies’ shares rising, but the company representative declined comment about the possible merger.

Alessandra Gadelha, investor relations officer of Companhia Vale Do Rio Doce (Nyse: RIO), explained that Vale, a Brazilian company, has the second largest global market share in its business, metals and mining.

Gadelha discussed Vale’s production, its current and future demand, and its performance. She noted that Vale is a significant cash generator with good margins. The company recently increased its dividend by 32%, and has returned more than 54% annually to its shareholders in recent years.

She agreed with Johnson that demand will slow somewhat from emerging markets, but will still be handsome. And with no new discoveries on board for the mining sector, Gadelha expects continued robust demand for the next five years.

Like BHP, Vale is trying to take over another mining company, Xstrata (London: XTA.L), and recently sweetened its bid to more than $89 billion. Both stocks are trading near their all-time highs.

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