Warren Buffett’s Favorite Foreign Stocks

He may be an American-investing icon, but Warren Buffett still owns a few foreign stocks. Why? The funny thing about a disciplined value-investing approach is that it works all over the world — not just in the United States. The bullish kicker for Buffett is how these stocks not only offer all the upside of long-term value names, but also offer a geographical diversity that simply can’t be achieved with an all-U.S. portfolio. 

Interested in following the Oracle of Omaha’s lead? Good. Here’s the run-down of Mr. Buffett’s biggest foreign equity holdings, via Berkshire Hathaway’s (NYSE: BRK-B) $52 billion portfolio.

1. GlaxoSmithKline PLC (NYSE: GSK)
Berkshire’s 1.51 million shares of U.K.-based drug maker GlaxoSmithKline translates into a holding of about $57.6 million, or 0.11% of the Berkshire portfolio.

As for why he likes GlaxoSmithKline, the company is a textbook Buffett play. With more than $21 billion in cash or cash equivalents in its war chest compared to a market cap of $97 billion, Glaxo’s already got a lot of built-in value. The pot is sweetened further by a dividend yield of 6.4% and a forecasted earnings-per-share of $3.75 for 2011. That’s a projected P/E of 10.2.

2. Sanofi-Aventis (NYSE: SNY)
Investors can actually beat Buffett at his own game with French pharmaceutical drug maker Sanofi-Aventis, as it’s currently trading at about a 20% discount to what he paid. In fact, this is Berkshire Hathaway’s biggest unrealized loss at this time. [See: “Buy These 4 Stocks for Less than What Buffett Paid”]

Even after the $20 billion purchase of Genzyme, it’s priced at a paltry forward-looking P/E of 8.4, and boasts a dividend yield of 3.1%. It’s not perfectly clear, however, how or if Genzyme will shake those numbers up going forward.

On a side note, Buffett isn’t exactly a fan of the health care sector; only about 5% of the Berkshire Hathaway portfolio consists of health care names. So, for him to specifically choose these two names speaks very highly of both.

3. Tesco PLC (TSCDF.PK)
Don’t be rattled by the pink sheet status of Tesco. Unlike the small and shaky companies you’ll often find listed as pink sheet stocks, Tesco is large and legitimate. The pink sheet listing is simply a matter of convenience, since being listed on a U.S. exchange requires a massive amount of red tape. 

Tesco is essentially the Wal-Mart (NYSE: WMT) of England. Or was anyway… Now the retailer/grocer is on a global expansion spree, with more than 5,000 stores in 14 countries.

Buffett owns nearly 4 million shares of South Korean steel and iron company POSCO. That’s about $1.7 billion worth, which is 4.6% of the whole company. The math doesn’t make sense with the shares currently priced at $104 each, but he doesn’t actually own the ADR (or American Depository Receipt, which is how most U.S. investors would take on a position). He bought the shares directly, at a total cost of $768 million. That’s an unrealized gain of 122%.

Either way, the company’s earnings have been strangely solid and consistent over the past five years… no losses, with a pretty stable top line to boot.

Yet, the stock has slipped nearly 10% in the past six months as costs have risen while steel prices have tumbled. In fact, POSCO shares have fallen to a trailing P/E of 8.3 on the sales/profits divergence. With the company mulling price increases though, margins may widen again and propel the stock back up to something more typical of a steel company, like a P/E around 14.0.

5. BYD Co. Ltd. (BYDDY.PK)
Chinese battery and electric car manufacturer BYD Co. is another pink sheet name, but for the same reason as Tesco PLC — it’s a matter of convenience and not a credibility red flag. BYD is also one of Berkshire’s most profitable holdings, up from the initial investment of $232 million to the current value of $1.18 billion. For those of you keeping score, that’s more than a 400% move since the 2008 purchase.

Of course, it’s not like the move isn’t deserved for this $3.7 billion high-flier. The company recently inked a deal with Daimler AG to co-produce an electric car by the year 2013, putting BYD into a horse race that could make up as much as 10% of the entire auto market by 2020. So, the 44 billion yuan ($670 million) it’s on pace to post as revenue in 2010 could swell considerably in the foreseeable future, after already growing by 31% in the first nine months of last year. 

Action to Take –> Considering the Oracle of Omaha’s long-term track record, this is a scenario where the smart-money decision is simply to ride the professional’s coattails… mostly.

GlaxoSmithKline, POSCO and Tesco are classic Buffett-like picks, with low P/E ratios, reliable businesses and, in the case of Glaxo, a very nice dividend.

BYD Co. and Sanofi-Aventis, on the other hand, may be something to skip for the time being. Though BYD has been a big winner for Buffett so far, it’s likely that the bulk of its value has already been unsheathed by the triple-digit rally — there’s just not as much value to unlock now. As for Sanofi, it paid dearly for Genzyme, but it may not generate as much return on that investment as many expect.

For now, it may be best to stick with the classic Buffett-like value ideas of Tesco, GlaxoSmithKline, and POSCO.

[More on Warren Buffett in the InvestingAnswers Feature: 50 Warren Buffett Quotes to Inspire Your Investing]

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