A new way to invest offshore

With almost a year of global share recommendations under our belt, it's time to reveal the logic of our model portfolio.

Summary: As Eureka Report has been recommending international shares for almost a year, now is a good time to take a retrospective look at the performance of our investments and our strategy, as well as what lies ahead.

Key take-out: One way to take an organised and diversified portfolio approach is to invest in Eureka’s international model portfolio, a 10 stock high conviction investment vehicle that I manage on a daily basis.

Key beneficiaries: General investors. Category: International equities

It’s been almost a year since I began recommending individual global stocks to Eureka subscribers. As we now approach the end of the financial year end a retrospective look seems in order.

Our aim

Our goal is to provide Eureka subscribers overseas equity investment ideas that are timely and profitable. Over the past 12 months we have recommended 32 stocks from around the globe and have provided updates as to how these companies are travelling in a fundamental sense by analysing and regularly commenting on the earnings reports as they are released. Most have done well. If these 32 stocks were all held in a dedicated portfolio, it would have outperformed benchmarks significantly.  

Many of the high growth names have done particularly well. Since  recommended, Ambarella is up 143 per cent, Celldex Therapeutics 138 per cent, FireEye 63 per cent, Splunk 66 per cent, Arista Networks 32 per cent, and Mobileye 30 per cent.

Some of larger companies have also outperformed with Amazon up 44 per cent, Netflix 33 per cent, Facebook 10 per cent, Techtronic 20 per cent and Fanuc 15 per cent.

These are local currency returns at the time of writing. An Australian dollar investor would have done even better.

Diversification  

Overseas equity investors need to be diversified in terms of industry, market capitalisation and, to some degree, region. Thus we have tried to present ideas taken from the many and varied industries and sub industries that are available around the world.

Looking at our recommended companies, we have a nice spread of industry groups including media (Walt Disney), pharmaceuticals (Pfizer and Bayer), biotechnology (Gilead and Celldex Therapeutics), medical devices (Intuitive Surgical), consumer discretionary/retail (LVMH and Harley Davidson), automotive (Tata Motors), energy (Schlumberger and Whiting Petroleum), transportation (CSX and Cummins), chemicals (Dow Chemical) and of course technology (Facebook, Google, FireEye, Ambarella, Arista Networks, Lenovo, Mobileye, etc.)

We also want some diversity in the size of the companies put forward. Roughly 60 per cent of our stocks are “large caps”, meaning market capitalisation in excess of $US10bn, while the remainder are small and so called “mid caps” ($US10bn or less in market cap.). Six of our 32 recommendations are from outside the US.

Our emphasis

For more detail on my background and investment philosophy, please refer to my first Eureka article published on July 9, 2014, Eureka brings the world to your doorstep. In that article, I outlined my approach:

“I am unabashedly a growth investor. I have always been attracted to the high growth areas of the markets such as technology, pharmaceuticals, biotechnology and media. I am attracted by companies that are growing well in excess of the market and their industry peers”.

I think this is pretty obvious in the selections I have provided subscribers over the last 12 months.

I am also a firm believer in the power of disruptive technologies and the enormous influence they have in changing the makeup of industries and even entire economies. Many of the technology names recommended such as Facebook, Amazon, Arista Networks, New Relic, Netflix, and FireEye fall into the “disruptive” category.

While not a “thematic “investor per se, I have also addressed what I believe to be some of the most significant disruptive influences that will influence the global economy over the next decade. Using the seminal 2013 McKinsey Global Institute report “Disruptive Technologies: Advances that will  transform life, business and the global economy” as our guide, we have covered and recommended companies involved in the majority of the major trends, including the mobile internet, the “Internet of Things”, cloud technology, autonomous self-driving cars and advanced robotics.

Over the next 12 months, I hope to continue the series and look at personalised medicine, advanced genomics, alternative energy storage, wearables and 3D printing.

Ideas

Some subscribers might (rightfully) wonder, where do I get my stock ideas and what exactly am I looking for? Well, if anything, it’s eclectic. Obviously I rely on my long experience in investing in global equity markets and the thousands (that’s right – thousands) of company visits I have made all over the world in the developed and developing world since the early 1980s. In discussion with investment consultants, I have jokingly referred to meeting with all the S&P 500 companies at least “twice”. Still, historical knowledge will only go so far as companies and industries change.

I’m still receiving brokerage research, some of which I find helpful but mostly I closely follow the markets on a daily basis in terms of what’s working and what isn’t. I also spend a great deal of time every day reading finance publications (Wall Street Journal, Financial Times, Barron’s, Bloomberg Business Week, Forbes, Fortune, The Economist, etc.) online and in print.

Investment criteria

Most of the companies I have put forward are in two categories. They either dominate their industry (Amazon, Facebook, Google, Disney, Schlumberger and Harley Davidson) or they are disrupting the industry status quo (Arista Networks, FireEye, Splunk and New Relic). I also look for companies that are undergoing transformational change like Dow Chemical, integrating savvy acquisitions (Lenovo) or have “underappreciated assets” like a forthcoming drug pipeline (Bayer, Pfizer).

Financial analysis

Fortunately I have a financial modelling system brought in from my days as a portfolio manager that allows me to automatically download into a spreadsheet 10 years of the balance sheet and income statements for any public company. I then forecast sales and profitability for the next three years as well as earnings per share and any major changes in the balance sheet. That forms the basis for valuation and a target price. These projections are available on the link below my stock recommendation.

Stocks outperform if they consistently deliver or exceed the forecasts of the analysts who cover them. That said, the quarterly earnings cycle often times throws out surprises and can result in share price volatility. Analysts change their projections and opinions based on the company’s earnings release and conference call. That’s why I spend a lot of time and print discussing company results and guidance in my Eureka submissions. It’s the best source of understanding what is going on in the company in real time.

Still, investors need to look beyond a three-month period and focus on the medium to long term and don’t necessarily react to every upgrade or downgrade and appreciate that earnings hits and misses are ephemeral in nature.

Model portfolios

I’m excited to report that as of July 1 2015, subscribers can also invest with me in an international “Model Portfolio”, a 10 stock high conviction investment vehicle that I will be managing on a daily basis. Stocks are chosen from the Eureka ‘universe” of our overseas recommendations on the basis of the “best buys” right now based on price, valuation, and potential upside.

Taking an organised and diversified portfolio approach to overseas investing makes sense. This portfolio can technically be purchased for as little as $US25,000.

Details and portfolio are available on the website.