Time To Diversify Internationally?

0:01Matt Frankel: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 Jon 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. And for that reason, we're not going with the 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 in a broad-based foreign index for investment portfolios is often considered good rules of thumbs for many investors.

0:48Matt Frankel:The S &P, 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?

1:24Matt Frankel:You can invest. This dichotomy doesn't necessarily exist. Yeah, that's absolutely the case. I mean, that's very much been my personal 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 MAG-7 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.

2:04Alphabet 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 for many years to come. I view it as very much participating in their international expansion. 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.

2:34Matt Frankel: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?

2:52Jon Quast: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. Amazon, which I would probably consider to be the least international of the Mag7 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 Mag7 company. I have a few other of my top 10 investments have substantial international exposure. Digital Realty Trust is a global data center operator.

3:30Jon Quast: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.

3:41Matt Frankel:Well, thank you both for that. 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 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.

4:17Or 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 that track that 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.

4:56There'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, that's BXUS. 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.

5:28Matt Frankel: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 kind of the way to go. But, Matt, any more ETFs that we should know about?

5:44Jon Quast:Yeah, no, Rachel, name 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. 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. And overall, the stocks it owns are cheaper than their U.S. counterparts in both 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.

6:19Jon Quast: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. That's one that I would take a look at.

6:32Matt Frankel:Well, thank you both. Thank you, Esk, 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.

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7:52Matt Frankel: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 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.

8:34Matt Frankel: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 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.

9:13So 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?

9:27Matt Frankel:Yeah, I think that there are a whole lot of investors out there who simply look at the chart of the last year. There's one group of investors that if it's hitting the 52-week lows, then they think it's a good buy. Other investors actually would do the 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?

9:57Jon Quast:Well, both. I mean, I look at the fundamentals and growth story first before I consider what the 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 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.

10:30Jon Quast:It's a fundamental change, and that's more of a reason to stay away from me. It really depends on the situation.

10:36Matt Frankel: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 MercadoLibre. And just to the point of momentum, MercadoLibre 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 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.

11:32Stock 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, both regional logistics and otherwise fintech customer acquisition. And so what they're 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.

12:06But there's still a lot of underpenetrated markets for them to expand in. So, you know, 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.

12:25Matt Frankel:Okay, so lost momentum, but in your opinion, maybe still a stock that is worth buying here before it starts to rebound? I think it's a quality business. I think you have to understand kind of some of the risk elements of their framework, 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.

12:59Matt Frankel: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, down 50 % from its high. Are there merits to buying SoFi stock right now today after it's seemingly lost incredible momentum.

13:21Jon Quast:Well, so I love it 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. So 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 that's a red flag. Management issued a dilutive equity raise.

13:56Jon Quast: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.

14:32Jon Quast:Kind of like MercadoLibre, there's a lot of parallels here between their results. The company is growing rapidly. It's highly 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.

15:07Jon Quast:So 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 kind of an add-on where you get a high-yield savings account. They're truly becoming like the bank for some of their customers.

15:22Matt Frankel: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.

15:31Jon Quast:I will answer by saying, I bought more SoFi last week when I could finally shut up about it for a couple of days. 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. There's a chance that if we get a recession, it could go down even further. But I'm a buyer at these levels.

15:53Matt Frankel:Skin in the game. The answer doesn't get any better than that. Thank you. After the break, we're going to go back to the mailbag one last time, and we're going to talk about some cybersecurity stuff. You're listening to Motley Fool Hidden Gems Investing.

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17:16Matt Frankel: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 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 One as a potential investment to be added in one 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 Anthropics Mythos model?

18:02Matt Frankel:Would Anthropics Mythos models be a boon or bane for cybersecurity companies such as Sentinel One? Kind regards, Avanissa Sar. Okay, I am Captain 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 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.

18:41Matt Frankel: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 AI company Anthropic 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 networks, they're all part of this Project Glasswing 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?

19:25Jon Quast: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 spaces 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 had an advantage when it comes to using it to help harden their defenses.