It's a risky investing strategy, but it's tempting: To profit from rapid growth around the world, investors can invest directly in fast-growing, midsize international firms.
A recent report from Standard & Poor's identifies 300 of these firms around the world (S"P, like BusinessWeek.com, is a unit of The McGraw-Hill Companies (MHP)). Market capitalizations generally in the $1-billion-to-$5-billion range put these companies in the "markets' sweet spot," S&P argues. After surviving a tumultuous startup phase, these outfits offer more stability than smaller firms. But these mid-cap names also grow faster than their larger rivals—often exploiting fast economic growth in developing countries like China.
For investors, an international mid-cap growth strategy has had its rewards. S&P published a similar list in 2003, and from 2002 to 2007 the average market capitalization of those firms nearly tripled. See the accompanying slide show for selected names from S&P's 2008 list.
Potential Hazards
However, even experienced professional international investors warn there are pitfalls to this investing strategy.
For one thing, experts say, the price must be right.
"It's nice to have fast-growing companies, but if you can't buy them at the right price it doesn't make sense," says Michael Stack, co-portfolio manager of the UMB Scout International Discovery Fund (UMBDX).
Recently, worries about a global growth slowdown have sent world stock markets tumbling. That highlights the risks inherent in any equity investing, but it also now creates an opportunity for bargain hunters. "We're able to buy many of these companies at a much cheaper rate relative to their growth," particularly in Asia, says Rob Lutts, chief investment officer at Cabot Money Management.
Many large stocks can afford to list their shares on various exchanges around the world; a listing on the Nasdaq or New York Stock Exchange makes it much easier for U.S. investors to buy in.
Do Your Research
However, the vast majority of small and midsize firms around the world don't list on U.S exchanges. This creates all sorts of complications for U.S. investors. There is currency risk: A strengthening dollar will hurt the value of foreign holdings. And practical problems: Transaction fees are often higher for foreign stock purchases.
But the biggest barrier for U.S. investors may be getting information on midsize companies. While many companies translate annual reports and other documents into English, some do not.
Also, many medium-size foreign firms are covered by relatively few research analysts. "You need to do your own due diligence," Lutts says. "You have to spend time trying to understand the company," says Edwin Lugo, the head of Franklin Global Advisers' non-U.S. small- and mid-cap growth equity team.