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Intrinsic Value of Overseas Investments
Long term investors in US stocks commonly look for intrinsic stock value before buying. In general, one looking for offshore investments should apply much of the same thinking when buying foreign stocks and engaging in other offshore investments. What is intrinsic stock value when we are considering the intrinsic value of overseas investments? At its basis, the intrinsic value of an investment is its fundamental value. One predicts the future income of an investment and compares that income to a baseline such as US Treasury bills. The intrinsic value of overseas investments can likewise be calculated by comparing expected income to a baseline, whether US Treasuries or US stocks or any other US based investment. Calculating the intrinsic value of overseas investments can be a standard procedure when an investor buys foreign stocks listed as American Depository Receipts on the New York Stock Exchange. It can get more complicated when looking at direct investment in a foreign country, changing currency values, political stability or instability, and other “offshore” factors.
A Relatively Easy Calculation
Limit your offshore investments to American Depository Receipts (ADR’s) of foreign companies. Level I ADR’s must comply with the same SEC rules as US companies. This allows for sound fundamental analysis of these equities. It is reasonable in this case to use US Treasury yields as a base for comparison or simply a composite yield of a basket of US stocks. If your offshore stock investment promises a better yield than a comparable US stock it should be valued higher. If it is not, the foreign stock has an intrinsic value higher than its current market value and you should buy it.
A More Complicated Appraisal
There are certainly many more offshore investment opportunities than buying foreign ADR stocks. US companies that do business offshore offer a diluted version of foreign and stocks are amenable to the same intrinsic value calculations as foreign ADR’s. Foreign stocks purchased on a foreign stock exchange, however, may be a little harder. The issue often times when investing in foreign stock markets is that the amount of hard information that a prudent investor requires is simply not there. Thus the investor needs to use a large “fudge factor” when making his calculation. In a really difficult foreign market this is not stock investing but rather pure speculation or gambling. To the degree that one has insider information it may still be profitable. To the degree that the foreign government does not bar insider trading it may not even be illegal. Nevertheless proceed with caution when trying to calculate the intrinsic value of overseas investments in non transparent markets.