Motley Fool Hidden Gems Investing - Time To Diversify Internationally?

Starting point is 00:00:00 John Quast. Is it time to start looking outside the U.S.? This is Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm John Quast. I'm joined today by Fool contributors Rachel Warren and Matt Frankel. This is Memorial Day, if you're listening to this, but we're taping a couple of days early. For that reason, we're not going with news of the day or something like that, we are diving into our mailbag here today in all three segments. And let's just get right into it. We have a question here from one of our listeners who just goes by S, but it says, Dear Fools, the S&P 500 and a broad-based foreign index for investment portfolios is often considered good rules of thumbs for many investors. The S&P,

Starting point is 00:00:48 however, has become increasingly concentrated in the Magnificent Seven. For investors looking to diversify and add more individual countries to their portfolios, such as Japan or India? For example, how should investors approach investing in more concentrated foreign investments? Now, before we get into this first question here, I want to point out that the way it's worded makes it sound like there are two opposing approaches. You can either invest in the Magnificent Seven or you can invest internationally, as in you can do one or both, but you can't do both at the same time. And that's not necessarily true, right, Rachel? You can invest. This dichotomy doesn't necessarily exist. Yeah, that's absolutely the case. I mean, that's very much been my personal

Starting point is 00:01:32 approach as an investor. So my portfolio is quite heavily weighted in the U.S. mega cap tech companies. And actually, because of that, there is really a built-in international diversification there. I mean, the MAG7 function essentially as global economic conduits. They're not just domestic enterprises. And actually, they generate a lot of their revenue outside the U.S. So just to put some numbers to that, Meta and Apple derive about 62% and 57% of their respective revenues from foreign markets, which might surprise some people. Alphabet pulls in about 51% of its revenue from international markets. So not everyone has to take that approach, of course. But for me personally, when I'm picking stocks, I've held these companies for many years. I plan to do so

Starting point is 00:02:16 for many years to come. I view it as very much participating in their international expansion. You know, you're capturing a lot of the tailwinds from AI, from cloud computing rollouts, and other really exciting tech sector events just by investing in these major businesses. Yeah, I think it's so easy to overlook the fact that a large part of U.S. stock market performance has been driven by the fact that these U.S.-based companies have gone global. Matt, how about you? Do you own any USA companies that generate substantial revenue from overseas? A few. I am not as MAG-7 heavy as Rachel is. My MAG-7 investments are Alphabet, which technically is not through my wife's portfolio, but one big pot,

Starting point is 00:03:01 and Amazon, which I would probably consider to be the least international of the MAG-7 in terms of revenue. The majority of their revenue is domestic. Some of my largest investments, like General Motors, like Berkshire Hathaway, Realty Income, they're mostly domestic. Mercado Libre is a top three investment for me. That's one exception, but it's not a mag seven company. And I have a few other of my top 10 investments have substantial international exposure. Digital Realty Trust is a global data center operator. Pinterest, over 80% of its users are international. Disney is a surprisingly international company. I'm a little more underweight international in terms of individual stocks. All right. Well, thank you both for that.

Starting point is 00:03:42 And let's go ahead now and kind of dive more into the meat of the question here regarding international diversification, specifically mentioning Japan and India in their question. Rachel, there are simple ways to diversify into those markets. Yeah. I mean, there's a few different ways to do this. So, for example, if you're looking at specific foreign markets like Japan or India, you can look at exchange-traded funds, ETFs that focus on specific regions or countries so that you can really access a whole basket of foreign companies without the operational hurdles of investing in international stocks, or maybe you don't want to just invest in individual stocks. You want to go for the basket approach. So, just to give a couple examples, there's funds

Starting point is 00:04:24 that track the premier localized benchmarks like Japan's Nikkei 225. That's actually a price weighted index of 225 blue chip giants like Toyota and Sony that are listed on the Tokyo Stock Exchange. There's also India's Nifty 50. There's ETFs that follow that. India's Nifty 50 is a market cap weighted index that tracks the 50 largest, most well-capitalized companies on their national stock exchange. But there's also BlackRock, for example, ETFs that offer targeted vehicles. There's their iShares MSCI Japan ETF, that's ticker EWJ. And then there's ticker INDY, which is the iShares India 50 ETF that actually tracks the Nifty 50 that I was talking about. One other one I'll name, there's the Vanguard Total International Stock ETF,

Starting point is 00:05:12 That's B-X-U-S. These all provide some general baseline for an exposure. I'm not saying to go run out and buy shares, but if you're interested in looking into these markets, you want to take that basket approach. Maybe take a look at those and see if they make sense for your portfolio. Yeah, I'll agree with that. You definitely want to be investing in something that you know. And sometimes in international markets, it's a little bit harder to pick individual stocks. Maybe that ETF, that basket approach is the way to go. But Matt, any more ETFs that we should know about? Yeah, no. Rachel named some good ones. Because most of my larger investments, like I mentioned, are mainly domestic in nature, I've been actively diversifying my portfolio through ETFs.

Starting point is 00:05:54 One in particular I've been using is the Vanguard International High Yield ETF, BYMI. It owns over 1,500 companies. It has an excellent dividend yield. Overall, the stocks it owns are cheaper than their U.S. counterparts in both the price-to-earnings and price-to-book basis. It's a really attractive ETF right now. Don't think that just because it's an international ETF that it's full of a bunch of companies you've never heard of. Top holdings include Toyota, like Rachel mentioned, with the Nikkei 225. Nestle, some of the major pharmaceutical companies are based overseas. It's a lot of companies that you've probably heard of before. So that's one that I would take a look at.

Starting point is 00:06:33 Well, thank you both. And thank you, S, for the question. Hope we spoke to it well. After the break, we're going to go back into the mailbag, talking about stocks that are losing steam. You're listening to Motley Fool Hidden Gems Investing. Infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune function and Coffee Plus B6 to keep your day moving. Or go with the flow and choose Ginseng Delight,

Starting point is 00:07:09 our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Welcome back to Motley Fool Hidden Gems Investing. We're going into our second mailbag question here in this episode, and here's what it says. Is it a good approach to invest in companies that have lost momentum, that are very unlikely to beat the market in the next few quarters, but companies that have great growth potential? Is this the best

Starting point is 00:07:40 way to get into good growth stock at attractive valuations before institutions start buying them? Would you say companies like SentinelOne, MercadoLibre, SoFi, and even MetaPlatforms qualify for such companies? Thank you. And Rachel, I want to start here by addressing another assumption that's kind of baked into the question. A drop in stock price doesn't necessarily mean it's a good value stock, right? That is absolutely right. The actual price of any given stock doesn't necessarily tell you much in and of itself other than what the market values that business at at that point in time. Sometimes you see a stock drop, maybe there's a value opportunity there. But when you're looking at companies that have lost momentum, the biggest mistake we can

Starting point is 00:08:26 make as investors is just focusing on the stock chart. So let's say you see a 20, 30, 40, 50% drop. That doesn't automatically mean value. Sometimes a falling price is actually a justified correction for a business where the thesis is becoming bent or even broken. So the real question when you're looking at a business that has seen a compression in valuation is, do they possess a durable competitive moat? And also, does that business actually fit your specific portfolio structure and risk tolerance? Yeah, I think that there are a whole lot of investors out there who simply look at the chart of the last year, right? And there's one group of investors that if it's hitting the 52-week lows than they think it's a good buy. Other investors actually would do the

Starting point is 00:09:10 opposite. They look at the 52-week high stocks and they're like, well, this one seems like it's going up. I want to ride this one higher and higher. But Matt, what about you? Do you like to buy stocks that have momentum or stocks that have lost momentum? Or does that even factor into your process? Well, both. I mean, I look at the fundamentals and growth story first before I consider what the momentum or lack of momentum is. I love buying companies on sale. I'm definitely the value investor of this group. But it's important to ask why companies have lost momentum. So just for example, some of my financial and real estate stocks that I own have lost momentum simply because interest rates and inflation are going up and not because of anything to do with

Starting point is 00:09:49 their underlying businesses. On the other hand, there are some stocks like in retail, for example, that have lost momentum because inflation is causing customers to lower their spending. So it's a fundamental change. And that's more of a reason to stay away from me. So it really depends on the situation. Let's go ahead and now start talking about the specific stocks that this listener asked about. We're not going to speak to all of them. I'll go ahead and set those expectations. But let's start with the first one here. Rachel, let's start with Mercado Libre. And just to the point of momentum, Mercado Libre stock is down more than 30% this year and down 37% from its high. What is the market afraid of here? Yeah, I'll say this is not a stock I own,

Starting point is 00:10:35 but it is a business I follow pretty closely. It's one that I actually really personally like. So the underlying business is actually growing at a pretty hyper growth rate, but we've seen, as you noted, the stock experience pretty sharp pullbacks. So just to kind of put some numbers to that. The company recently posted a 50% surge in revenue that was just shy of $9 billion. Items sold also climbed by about 50% year over year. Stock was sold off because net income fell. That totaled about $417 million in the recent quarter. And the reason for that, just to put it really simply, is they are aggressively funneling cash into their logistics network, you know, both regional logistics and otherwise fintech customer acquisition. And so what they're

Starting point is 00:11:19 focusing on right now is they are investing in their growth story. That is meaning that they're sacrificing some short-term earnings. And the goal is to build this really unassailable logistics network across Latin America, which is their core market and one in which they retain a dominant footprint, but there's still a lot of under-penetrated markets for them to expand in. So only shareholders can determine whether that is a smart move or not, but that is what we're seeing. I don't think it breaks the thesis for the business personally, but there is certainly pressure on earnings that is translating into at least a depressed investor appetite towards the stock. Okay. So, lost momentum, but in your opinion, maybe still a stock that is worth

Starting point is 00:11:58 buying here before it starts to rebound? I think it's a quality business. I think you have to understand some of the risk elements of their freight work, take a look at the losses they've been seeing in their credit portfolio. But I fundamentally think that the business provides a really great value proposition to invest in one of the fastest-growing markets for fintech and e-commerce today, which is Latin America. Love it. Okay, Matt, your turn here. Let's actually talk to one that I know that you follow very closely. I believe it's one that you own, but it's SoFi. And SoFi is actually down 15% over the last five years. Not over the last year, over the last five years, if you start the clock five years ago, down 15% from that,

Starting point is 00:12:38 down 50% from its high, are there merits to buying SoFi stock right now today after it's seemingly lost incredible momentum? I love that you frame it like that. To be fair, exactly five years ago, SoFi was a recent SPAC IPO during the height of the SPAC boom. That's not the best timeframe to look at. But you're right, it has pulled back from its recent highs significantly. It was really riding high toward the end of 2025. There are a few reasons for this. Just in the first quarter numbers, the tech platform reported a sharp decline in revenue. That's the Galileo business, all the third-party infrastructure they do. They've lost one big customer. That's what caused it. But it's still a red flag. Management issued

Starting point is 00:13:22 a dilutive equity raise. They raised $1.5 billion earlier this year. No one really knew why. I didn't really know why that management's answer wasn't that great. That really scared people. most of SoFi's loan book is made of personal loans. It's a vulnerable type of credit compared to, say, mortgages or auto loans. Every time you see news like consumer confidence is at an all-time low, that makes people scared to invest in a company that primarily owns personal loans in their loan book. They're an unsecured form of borrowing. On the other hand, SoFi never added more members to its platform than it did in the first quarter. Like MercadoLibre, there's a lot lot of parallels here between their results. The company, it's growing rapidly. It's highly

Starting point is 00:14:07 profitable. It's been a Rule of 40 company, which is a very widely followed profitability metric for several years. Its latest score was a 72. There aren't that many companies that have that. More importantly, SoFi is doing a much better job of cross-selling its products to its existing members. So, 43% of new products opened in the first quarter came from their existing membership base. A product is something like a brokerage account or a credit card. This has steadily climbed from 36% a year ago. That's a very bullish sign that SoFi is finally accomplishing its goal and really becoming the bank of choice for more of its customers, not just an add-on where you get a high-yield savings account. They're truly becoming the bank for some of

Starting point is 00:14:48 their customers. Okay, so same question here that I asked Rachel. It's lost momentum, but it sounds like, from your perspective, in your opinion, the long-term investing thesis is pretty much on track. I will answer by saying I bought more SoFi last week when I could finally shut up about it for a couple of days. And I really like what Anthony Noto is doing with this business, their CEO. I think it's on the right track, but it's economically sensitive. So there's a chance that if we get a recession, it could go down even further. But I'm a buyer at these levels. Skin in the game. The answer doesn't get any better than that. Thank you.

Starting point is 00:15:24 after the break we're going to go back to the mailbag one last time and we're going to talk about some cyber security stuff you're listening to motley fool hidden gems investing in toronto every arrival is a statement and nothing says it better than this cadillac optic was the number one selling luxury ev in canada for 2025 find your rhythm across a seamless 33 inch display and an immersive 19 speaker akg surround audio system this city demands agility and optic delivers with precision to make every drive extraordinary let's take the cadillac find out more at cadillac canada.ca luxury sales claim based on s&p global mobility canadian new vehicle total registrations for calendar year 2025 for the cadillac definition

Starting point is 00:16:07 of luxury new from nespresso blend wellness into your coffee routine with a coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com welcome back to motley fool hidden gems investing and this is a mailbag centric episode and if you want to get one of your questions on a future mailbag segment, you can email us at podcast at fool.com. And what we ask is that you keep the question short-ish, foolish. You can email

Starting point is 00:16:57 us at podcast at fool.com, podcast at fool.com. And here's the final one. It says, Dear Motley Fool team, hope all is well. Thank you. In one of your episodes, you had recommended Sentinel-1 as a potential investment to be added in one's stock portfolio. The stock has been falling since. Do you see the fundamentals of the company changing since your stock recommendation, especially given the recent launch of Anthropix Mythos model? Would Anthropix Mythos models be a boon or bane for cybersecurity companies such as SentinelOne? Kind regards, Avinash Asar. Okay, I am capped in clarification here today. I feel like I need to clarify this one once again, on the podcast, we are not a stock picking podcast. And so it could have been that

Starting point is 00:17:44 on a previous episode, one of our guests on the podcast felt like in their opinion, Sentinel-1 was a stock worth buying. That doesn't necessarily reflect the entire team here on the podcast. That's just one person's opinion. In fact, I personally have a different opinion on Sentinel-1, but that's neither here nor there. So I just wanted to clarify that, that we don't give out personalized investing advice. The essential question here is regarding Mythos. Now, this is a model that Anthropic, AI company Anthropic, well, created and then didn't release because there was cybersecurity concerns regarding how good the model was. Now, Anthropic has enlisted the help of many companies to tackle this issue, including Amazon, NVIDIA, CrowdStrike, and Palo Alto

Starting point is 00:18:32 So, networks are all part of this project glass wing that it is spearheading to address these cybersecurity concerns with AI. But Matt, what do you think about mythos and Sentinel-1's vulnerability in particular? So, I'm generally of the opinion that AI is more of an opportunity than a threat to cybersecurity. I know that's not the most popular opinion right now, especially with things like mythos and all these other models coming out that could make things more vulnerable. But I'd name several companies in the cybersecurity space as what I would call my top-tier beneficiaries of the opportunity. That includes CrowdStrike, Zscaler, Palo Alto Networks, maybe a few others. Those three in particular have mythos preview access. They've

Starting point is 00:19:16 had an advantage when it comes to using it to help harden their defenses. Sentinel-1 isn't on the list, at least not yet. Like I said, I have a different opinion of Sentinel-1. Having said all that AI models create a more dangerous threat landscape in general. There's a solid argument to be made that because of this, enterprise cybersecurity spending is going to trend higher across the board, at least over the next few years. And that's just kind of my broad take on it. It's interesting that Sentinel-1 isn't part of this group yet, considering it is considered one of the more AI-native platforms. But Rachel, I want to get your thoughts here as well. What do you think about mythos in particularly as it regards Sentinel-1? I think what I want to also

Starting point is 00:19:57 comment on is just that broader implication for the cybersecurity space as well. I actually personally have some concerns about Sentinel-1 just as a broader business. Not enough time to go into that on today's episode. But I will say some of the market panic that we've seen around Anthropix mythos model, I do think it's more of a boon actually than a bane for these advanced cybersecurity providers. And I'll explain why. I mean, so this mythos model, it's kind of sent shockwave through the tech world because it's very uncannily capable of scanning software code to identify and autonomously write exploits for various vulnerabilities. And so that ability to chain vulnerability discovery and exploitation together at machine speed had obviously caused

Starting point is 00:20:35 a lot of cybersecurity stocks to nosedive because that created a lot of fear in the market that some of these legacy security tools would be rendered obsolete. But the point I want to make is that finding flaws is not the same as fixing them. So yes, Mythos can identify thousands of new vulnerabilities, but organizations can't manually keep up with a massive surge in software patches. They must rely on active runtime behavioral defense to shield their unpatched systems. And I also think what we're seeing is sort of this mandatory transition to machine speed warfare. So Mythos actually lowers the barrier to entry for complex automated cyber attacks, which means that threat volumes could scale exponentially. And that means that those legacy human-led security

Starting point is 00:21:19 operation centers, in my view, are in need of dynamic software and services like these cybersecurity providers lend. And so I actually think, if anything, Mythos is more of a marketing campaign for the necessity of autonomous, if not AI-driven cyber defense. So I have concerns, as I noted, about Sentinel-1's competitive positioning against some of these other legacy giants. But I very much think there is still a significant opportunity for some of these businesses moving forward. And I actually think that there are some tailwinds that have been introduced by these vulnerabilities that Mythos has unlocked. Yeah, it's so interesting how many of these tech companies are noting that their engineers are becoming more productive thanks to

Starting point is 00:22:02 agentic AI. That would probably be the case with bad actors as well, being more productive in attacking with a cybersecurity threat because of AI. So that does create, to Matt's point, a more heightened security environment. But to both of your points here, that does also create opportunity for the companies that can meet this threat head on and prevent attacks. We'll have to keep an eye on that in the coming months and quarters, years ahead. I'm sure it's only going to get more interesting as we go. But that's all that we have time for today on the show. As always, people in the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

Starting point is 00:22:46 so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer, Dan Boyd, and the rest to the Motley Fool team for Matt, Rachel, and myself. We thank you so much for listening to our show today, and we will see you again soon.

Motley Fool Hidden Gems Investing - Time To Diversify Internationally?

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