Here are Three International Growth Stocks to Consider

Foreign stocks have substantially underperformed the U.S. market in recent years. The MSCI ACWI ex-USA index of foreign stocks returned just 3.52% annualized in the five years through June 30, compared to 12.31% for the S&P 500.

That has increased the attractiveness of foreign stocks, says Todd Morris, co-portfolio manager of Polen International Growth Fund  (POIRX) – Get Free Report. The fund scored an annualized return of 2.06% in the five years through June 30, according to Morningstar.

Polen International Growth employs a bottom-up selection process, with the portfolio concentrated in about 25 names. Among sectors Morris favors now are software, healthcare, the consumer, business services and information services.

We recently spoke to him about his views toward international stocks. Here are his comments, including several stock picks.

TheStreet.com: What’s your investment philosophy?

Morris: It’s concentrated growth over a long time horizon. Our criteria for stocks is high return on equity, strong balance sheets and above-average earnings growth. We seek mid-teens- percentage earnings growth over five years. We have concentrated, limited risk, with about 25 stocks in the portfolio.

TheStreet.com: What is the appeal of international growth stocks?

Morris: There are inefficiencies in the market. International stocks have been left for dead. Over the last 10-20 years international performance has been meager compared to [strong U.S. returns.]

The fact that many investors have turned their backs on international makes for interesting valuation opportunities. Three-quarters of global economic output comes outside the U.S.

TheStreet.com: What industries are attractive now?

Morris: Our process naturally leads us to avoid certain sectors – those that are leveraged and cyclical. We like software, healthcare, the consumer sector, business services and information services.

In software and services, customers lean heavily on service providers, and switching costs are high. That gives pricing power to the providers. It speaks to how critical a product or service is. In healthcare and high tech, there is intellectual property protection. These companies make the investment upfront to build unique products that can be sold many times over.

In the consumer sector, some companies make consistent investment in their brand identity. That builds an affinity among customers, allowing long-term pricing power and customer loyalty.

TheStreet.com: What geographies are attractive now?

Morris: We’re bottom-up investors, so we don’t set up geographic themes. We scan the non-U.S. marketplace around the world. That has led to holdings in companies based [in many countries].

The aim is to build a portfolio of high-quality companies with a strong growth rate. Large companies tend to be globally-based, even though they’re headquartered in a particular country.

TheStreet.com: Can you discuss three of your favorite stocks?

Morris: First, there’s Sage Group  (SGPYY) – Get Free Report. It’s a U.K. accounting and business management software company for small- and medium-size businesses. Software, of course, is mission-critical to business operations for these customers. Sage has recently transitioned to the cloud, making its software easier to deploy.

We think Sage is set to grow revenues in the high-single digits, with margin expansion. Its peers are fully valued, while Sage isn’t. It trades at 4.5 times revenue, while peers have traded over 10.

Second is Siemens Healthineers  (SMMNY) – Get Free Report. It’s a German company that’s the world leader in digital imaging equipment, such as x-ray and MRI (magnetic resonance imaging) machines. Every hour there are 250,000 patient touches of Siemens equipment around the world.

The company will benefit from an aging population in the developed world and a growing middle-class population in emerging markets. Also, there is a constant need for the machines and services across economic cycles. And the company has a compelling valuation at 22 times forward earning.

Finally, there’s ASML  (ASML) – Get Free Report, a semiconductor capital equipment maker based in the Netherlands. It’s the most important company in the world [for any sector]. Chips are ubiquitous: they power everything. And all the leading-edge chips are built with ASML equipment.

They have spent decades innovating new technology, making themselves the only supplier of advanced lithography machinery. We expect significant earnings growth in the next five years. The world will continue to need smaller, more powerful, more capable chips.

TheStreet.com: What are the biggest challenges of investing in international growth stocks?

Morris: There’s a tendency toward deglobalization, which could mean a breakdown of trade flows. That represents a change in the business landscape. All companies have to contend with that, and we have to be aware. A company may look good going backward, but we may have to reconsider growth prospects because of these changes.

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