The Small-Cap Investors Guide to International Stocks

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It seems like the same story every week – the most common questions we get here at the Penny Sleuth are the ones that deal with international investing. Today, I’m here to tell you about some of the immense opportunities that exist in overseas markets – and give you a glimpse at how you can easily gain access to them…

In the last few years, investing overseas was a popular theme – after all, with the dollar’s slide in the latter half of the 2000s, and burgeoning economies in the developing world, who wouldn’t want to put money on a company based in Sao Paulo, Beijing, or Bangalore?

Even the portfolio managers who proselytized the coming fall of U.S. stocks turned to international investments as a safe haven from sure disaster. But that all changed in 2008 when U.S. markets did indeed fall – and emerging market equities fell even harder.

With volatility on the upswing in 2010, does it make sense to invest money overseas anymore? Absolutely.

Although emerging market stocks were hit hard in 2008, they outperformed domestic equities as a group during the ensuing bounce back. And as you might expect, some of the top performers overall were the small-caps.

We’re always told that diversification is the key to safe, smart investing. But while we usually act on that advice by investing across different industries, investing across different countries and economies is equally important. That’s because it protects against some of the isolated economic events that can affect stocks in a particular location – be they geographic, governmental, or societal.

Put more succinctly, international stocks can give investors access to places that are enjoying economic growth when business in the United States is languishing.

How to Invest Overseas

Investing overseas has become easier than ever. With scores of American Depositary Receipts (ADRs) available today, investing in a company across the pond could be as easy as buying a share of General Electric (NYSE: GE ) or Microsoft (NASDAQ: MSFT ). And for less accessible companies, the increased availability of foreign-based brokerage accounts for U.S. investors has made things even easier. If you’re interested in gaining access to international markets, just call your broker – more often than not they have partners abroad who they can set you up with.

So, with the ease of investing abroad right now, which places present interesting economic opportunities for U.S. investors right now? These four regions offer some interesting growth in 2010…

Latin America: Agora Financial’s penny stock analysts have long been fans of the Latin American countries – a growing middle class and significant entrepreneurial opportunities are giving investors a shot at some truly enticing companies to our south. In fact, my colleague Greg Guenthner even holds shares of one “tasty” Brazilian company is his Bulletin Board Elite portfolio…

India: India continues to flourish as thanks in large part to multinational companies’ expansion into the region. Already, outsourcing firms and consumer brands in India have proven to be solid investments for millions of American shareholders. And a stronger U.S. dollar is encouraging even more commerce with Indian companies.

China: While Treasury Secretary Tim Geithner’s presence in China says quite a bit about the economic importance of this major exporter, perhaps Agora Financial’s own “delegation” in China right now says more about what we think about the country’s prospects. I’ll fill you in on their findings when they report back…

Europe: Don’t let the falling Euro fool you – for exporters and European stocks with large extensive business overseas, a lower Euro means higher profits. Forget about the big players – smaller EU countries have significant growth potential right now. Just be careful if you decide to play the Euro game.

Staying on Top of Small-Cap Concerns

As a penny stock investor, poorly disclosed financials and shady dealings should be no surprise – they’re just things that you train yourself to analyze and avoid. But with financial reporting requirements and ethical standards even less impressive for some foreign markets, vigilance is key to not getting burned by companies abroad.

When in doubt, stick with ADRs or international index ETFs – they offer significant exposure to overseas stocks and vetting by professional analysts.