ONE HEADLINE + + +

Table-Pounding Bargains

Investing in foreign stocks is like learning a foreign language. It sounds like an exciting idea at first. But then you realize the difficulty involved… so you don’t do it.

Puh-lease don’t do the same today. Especially since I’m going to make it as easy as downloading Duolingo.

Capisce?

Worldwide Sale

Forget Europe being “exceptionally cheap” as the recent Bloomberg headline reveals. All international stocks trade for shockingly low valuations.

How low?

• Cheap: Try 14 times forward earnings for European stocks

• Cheaper still: Try 12 times forward earnings for emerging markets stocks

To put that into perspective, U.S. stocks, as represented by the $SPX ( ▲ 0.06% ) , currently trade for 22 times forward earnings.

That means going overseas allows us to buy stocks at a 35% to 45% discount.

With everyone freaking out about U.S. valuations , what’s keeping them from backing up the truck overseas?

Simply put, we’ve been conditioned to expect the discounts and underperformance. Or as Ben Carson wrote in December 2024 (emphasis mine):

He’s hardly exaggerating or being dramatic. Consider:

• The proof: Right now, U.S. stocks account for ~70% of the market cap in the developed world, while European stocks account for less than 20%, per Apollo’s Torsten Slock (see here). That’s after being roughly even in 2008. (Yikes!). And no one’s blasting The Vapors and Turning Japanese anytime soon as Japanese stocks only account for a measly 5% market cap weighting in the MSCI World Index. (Double yikes!).

• The cause: 13 years of underperformance for international stocks versus U.S. stocks. That’s the longest period in history (see here).

• The lesson: Cheapness alone is not at catalyst for stock prices.

Yet, fast-forward to today and…

ONE CHART + + +

It (Looks) Different This Time

Notice I didn’t utter the dreaded and jinxed, “It is different this time?” Well, it certainly looks different.

Consider the year-to-date performance for key international markets…

• Germany $EWG ( ▲ 0.28% ): + 22%

• China $FXI ( ▲ 0.06% ): + 21%

• Italy $EWI ( ▲ 0.43% ): +19%

• France $EWQ ( ▲ 0.22% ): +17%

• U.K. $EWU ( ▲ 0.66% ): +12%

We’re even seeing the outperformance manifest in U.S. companies. Look no further than the chart above.

S&P 500 companies with more than 50% of revenue from overseas reported the strongest earnings growth during the fourth quarter of 2024. By a healthy margin of nearly four percentage points.

Since stock prices ultimately follow earnings, it’s no surprise then that share prices are (finally) reacting positively.

To be fair, it’s not just earnings. Other factors influencing the emerging shift in sentiment for international stocks include:

• President Trump: Like a parent giving teenagers no choice but to grow up, he’s cutting back defense aid to the European Union. In response, Germany’s unveiling unprecedented economic stimulus (see here).

• Small, but meaningful rebounds in GDP: Stock markets aren’t the same thing as economies. As such, they don’t automatically rise and fall in tandem. Yet, it helps stock performance when economies break out of a slump. And that’s precisely what we’re witnessing in Italy. Q4 GDP checked in positive, contrary to expectations for no growth. Look for other European economies to start doing the same. After all, Europe’s got a history of chart-topping GDP growth over the last decade (see here).

ONE INVESTMENT INSIGHT + + +

The Big Skinny...

Stock markets are forward-looking beasts. Right now, the message is loud and clear – there’s no more compelling value and momentum play than international stocks.

Sure, prices might be up 15% to 20% already. However, they could rise another 30% to 40% in a blink as they go from cheap and unloved to loved and fairly valued.

Granted, this might not sound as sexy as a disruptive technology stock with 10-bagger potential and a ton of risk. But I’ve never been one to turn my nose up at a low-risk way to make a 30% to 40% profit. Neither should you.

If you were wondering how in the hell I would tie-in the headline mention of Nirvana’s youth anthem and top-selling song of all-time, here you go…

Right after its release, Kurt Cobain revealed the song was about his friends, explaining, “We still feel as if we’re teenagers because we don’t follow the guidelines of what’s expected of us to be adults… It also has kind of a teen revolutionary theme.”

Consider this an encouragement to do the same. Shun what’s expected of you as an investor. Be a revolutionary, instead. Or at least a contrarian.

Duolingo Me

Here are two investments to make doing so even easier:

1. Follow the leader into $BABA ( ▼ 1.59% ): As my friend and top-performing hedge fund manager, Thomas Hayes of Great Hill Capital shared on the show with us, the company’s cheap (14x forward earnings), growing solidly overall (8% sales growth in most recent quarter) and expanding cloud and AI-revenue even more (13% and by “triple-digit[s] for the sixth consecutive quarter.) Even better, it’s far from a crowded name with only about 15% institutional ownership.

2. Diversify and simplify with $EFA ( ▲ 0.67% ): Most of us don’t have an edge in international markets, so single stock selection comes with single stock risk (i.e. much higher). We can avoid this by purchasing a basked of international stocks on the cheap with this ETF. In fact, it offers exposure to 724 stocks in Europe, Australia, Asia, and the Far East in a single purchase. Based on the current portfolio, it also provides a healthy dose of access to the cheapest stocks with a 23% weighting to Japan and a 58% weighting to Europe.

Don’t stop believin’… or being contrarian!

– Lou