American Depositary Receipts diversify your portfolio, reduce risk and give you industry access.

Since we last updated our list of ADRs in the July 2013/Second Report of The MoneyLetter we’ve made some changes to our recommended list of American Depositary Receipts, or ADRs. That’s because their situations changed for the better or for the worse.

This time, we have added consumer electronics manufacturer Panasonic Corp. as a buy. That’s because it’s expected to earn $1.90 a share next year, in contrast to its former loss.

We put hold ratings on ADRs with P/E ratios of 20 or more. The reason for this is, if things go wrong, the P/E can shrink and inflict losses on investors. So, we have removed semiconductor manufacturer Kyocera Corp from our list. It now trades at a forward P/E ratio of 24.4 times.

We have also removed Nestlé S.A. It trades at a forward P/E ratio of 19.5 times. Since this is close to 20, we see little potential for gains in the months ahead.

One more ADR we have taken off the list is advertising company WPP PLC. It trades at a forward P/E ratio of 20.6 times. All three remain holds.

When formerly-overpriced stocks trade at P/E ratios of below 20 times, we often put them back on buy. This is the case with put private education company New Oriental Education. It now trades at a more reasonable forward P/E ratio of 16.5 times.

Similarly, we put a buy on biotechnology and drugs company Novo-Nordisk. Its forward P/E ratio is 17.2 times. The company also raised its dividend to US$3.18 a share.

We have also now included audio and visual equipment manufacturer Sony Corp. It now trades at an attractive forward P/E ratio of 12.3 times.

The benefits

ADRs, offer you diversification. In fact, it’s tempting to call them American Diversification Receipts. They give you access to industries that Canada lacks or has in short supply. This can enable you to earn more while reducing your risk. They also let you diversify by currency.

We believe that ADRs have a place in most portfolios (ADRs and U.S. stocks should make up a quarter or so of your stock portfolio, depending upon your circumstances). Our list (see below) includes 24 buy rated ADRs. It includes companies from Belgium, China, Denmark, Finland, France, Germany, Holland, Israel, India, Italy, Japan, South Korea, Mexico, Spain, Sweden, Switzerland, Taiwan and the U.K.

Some of the above are so-called ‘emerging markets’. Such markets hold the potential for faster growth. Most have younger populations than the industrial world. This adds to the demand for goods and services now. And in the future, they’ll add to the demand for financial assets.

Offset risk

Investing in emerging markets raises your risk. But they have low correlations with U.S. stocks and with each other. This can help offset the higher risk. Particularly if you buy a mutual fund diversified by country.

Even so, correlations tend to be closer when financial markets fall, which reduces the advantage of diversification.

ADRs let you buy into industries you can’t buy here. For example, Japan’s Canon Corp. has no Canadian peers. This is a global manufacturer of photocopiers, printers, cameras and flat-panel display screens, among other products.

Many of the other ADRs operate in industries with few or no Canadian counterparts.

Even when you buy ADRs in the same industries as Canadian and U.S. companies, you can comparison shop and determine where you’ll get the better deal, at home or abroad.

You could, of course, invest in the company’s local exchange. But keep in mind that ADRs protect you from weaker reporting rules in some overseas markets – because they must file their U.S. financial statements in English using U.S. accounting rules.

Our ADRs deliberately exclude natural resources, financial stocks and some utilities.

After all, the Canadian market offers lots of resource companies, financial institutions and high-yield utilities (that face no withholding tax but instead benefit from the Canadian dividend tax credit). So our ADRs include more of the manufacturing and consumer companies that are harder to find in Canada.

One important thing is to consider all your portfolios (including your spouse’s) as one and strike a suitable overall balance. Use ADRs to add to the manufacturing and consumer sections of your portfolio and to get the benefits that ADRs can provide.

ADRs for your portfolio

Here are 24 foreign companies based outside the U.S. but trade in the U.S. as American Depositary Receipts, or ADRs. We have included each company’s 2012 earnings per share and estimated earnings per share for 2013 or fiscal 2014,  and the industry to help differentiate between stocks. They are all buys.

                                                                    — EPS —

Year 2013 are estimates            A – American Stock Exchange
EPS – Earnings per share            Q – NASDAQ Stock Exchange
Div. – Annual dividend per share        * – Over-the-counter