By Barbara Kollmeyer, MarketWatch
MADRID (MarketWatch) -- U.S.-listed shares of an Italian leather manufacturer and an Australian oil driller have made a lot of money for investors so far this year. But they don't tell the whole story of how the face of foreign listings on Wall Street has changed.
Samson Oil and Gas , up more than 80% this year, and leather maker Natuzzi (NYS:NTZ) , up almost 40%, are just two of 385 foreign companies that list American Depositary Receipts on U.S. stock exchanges. But the most dramatic rise in the ADR market has been the number of new listings from rapidly growing emerging countries.
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This year, U.S. investors could see the first ADRs from Kuwait and Vietnam, with Nigeria and Kazakhstan issues likely in the next two or three years, according to Anthony Moro, head of emerging markets for BNY Mellon Depositary Receipts, the world's biggest depositary bank for ADRs.
"Every quality company in the local markets wants to be the first to list on the New York Stock Exchange," said Moro. "We're moving past BRICs [Brazil, Russia, India and China] and into the frontier and second tier."
The total number of foreign companies coming to U.S. exchanges is down sharply, but the 22 foreign companies that listed in 2009 were dominated by Brazil and China - including Spanish spinoff Banco Santander Brasil (NYS:BSBR) and China media group Shanda Games . Just two listings came from Europe -- Belgian food and drug retailer Delhaize and British oil equipment group ENSCO .
ADRs are a part of the investment portfolio of the Oxford Club, which claims to be the biggest investment club in the world with more than 75,000 members.
Investment Director Alexander Green said the group has bought and sold Argentine-based Mercadolibre (NAS:MELI) several times, most recently buying it six weeks ago. Mercadolibre, which he describes as the eBay (NAS:EBAY) of Latin America, is "the market leader of e-commerce in Argentina, Brazil, Colombia, Peru, Mexico, Chile, Uruguay, Venezuela and Ecuador," he said.
"As the economy is tough in the U.S., the same thing is happening in Latin America. People are going online to buy things cheaper," Green said. The company, he added, has the potential to tap into 500 million Latin American users, from its current 42 million, as more people in the region access broadband Internet.
Chinese technology outsourcer VanceInfo Technologies is another stock in the Oxford Club's portfolio. The company's customers include Microsoft Corp. (NAS:MSFT) , Hewlett-Packard Co. (NYS:HPQ) and IBM (NYS:IBM) . "China now has an enormous pool of educated, English-speaking engineers and software developers and they are simply soaking up all the tech jobs from Europe and Japan," he said.
"We're not saying that everything is coming up roses in China, but this particularly company we think will do very well. We would prefer to buy this company over a China index like FXI [iShares FTSE/Xinhua China 25 (PSE:FXI) ]," he said.
Brian Callahan is a manager of the ICON Multi-Cap International ADR Portfolio for Denver, Colo.-based ICON Advisors, which uses a quantitative method for picking stocks. He said many of the new ADRs from China and Hong Kong wouldn't even enter his radar due to weak volume and a lack of earnings history.
One stock in the portfolio is South Korea's LGL Group Inc. (ASE:LGL) , which falls under a sector he likes -- information technology. Food and consumer staples are also favored areas. The fund recently bought shares of Diageo (NYS:DEO) , and also owns Unilever (NYS:UL) and Nestle (OTC:NSRGY)
Andrew Pringle, senior client portfolio manager for Invesco Aim's international/global funds, is bullish on Swiss pharmaceutical group Novartis (NYS:NVS) . He pointed to the stock's low valuation and potential for upside earnings surprises and earnings upgrades driven by low expectations.
Another health-care favorite is Germany's Fresenius Medical Care AG (NYS:FMS) , which Pringle said has lagged on worries over the potential impact of healthcare reform.
"We viewed the stock as attractively valued and it also has the potential to improve profitability over the next couple of years, particularly should bundled payment models prove successful within the U.S. health-care model," Pringle said in an email.
In the Motley Fool Independence Fund (NAS:FOOLX) , 20 out of 80 names are ADRs.
"We can buy anywhere in the world, but where we have the ability to buy a listed ADR in the U.S. versus the common shares in the home country, we pick the ADR every time," said Bill Mann, portfolio manager for the fund.
Over the past several years, some European names have delisted and been replaced by smaller-cap companies and more emerging-markets firms, Mann said. The BNY Mellon website shows three European de-listings in 2009, and four global de-listings in 2008. French insurer AXA was the latest to delist its U.S. shares, but still trades over-the-counter.
"The most extraordinary growth has come from Chinese companies -- large and small ones," said Mann, who is based in Alexandria, Va. "Three years ago, most of the companies you'd be able to get as an ADR were foreign banks, telecoms and industrials. Such as with Mercadolibre -- they're here because it's easier to get funding for growth on the U.S. exchange than it is in Argentina."
One fund holding is organic fertilizer supplier China Green Agriculture (NYS:CGA) , which Mann said has "a tremendous amount of potential," and is expected to benefit from China's push toward green technologies. The fund also recently bought shares of Spain's Telefonica (NYS:TEF) , as the market's concern about the Spanish economy and the euro zone made those shares attractive.
Mann said investors should make sure the ADR they buy has plenty of liquidity, because not all of them are easily traded. Moreover, he said, investors need to pay attention to sovereign risk of the countries where they are investing. "A company from Argentina will have a higher risk premium than the equivalent stock in the U.S. or France."