What is the ADR Screen?
The ADR Screen is AAII's growth-at-a-reasonable-price screen built specifically for American Depositary Receipts (ADRs) — a way to own foreign companies through securities that trade on US markets. An ADR is a negotiable certificate issued by a US commercial bank that represents shares of a non-US publicly traded company. It changes hands on a US exchange or over the counter, is priced in US dollars, and pays its dividends in dollars. That structure spares an American investor the friction of buying foreign shares directly: international settlement, global custody, a foreign brokerage account, currency conversion, and multi-currency bookkeeping. Bayer, Canon, Honda, Nokia, and Sony have all traded as ADRs. Most are mid- and large-cap names — the widely held, actively traded foreign issues that chose to list in the US to raise capital and lift their profile.
The core idea
The screen hunts for cheap growth and adds a momentum check. Its value engine is the PEG ratio: the current price-earnings ratio divided by the five-year historical growth rate in earnings per share. A PEG near 1.0 is roughly fair; below it, the market may be undercharging for the growth on offer; above it, expectations have run ahead of what the company has delivered. A low P/E on its own is no bargain if earnings are shrinking, so tying price to growth is the guard against buying something cheap for good reason. This is the growth-at-a-reasonable-price discipline Peter Lynch popularized — pay for growth, but not too much.
The screen uses historical growth rather than analyst forecasts, and for a practical reason: only about a quarter of listed ADRs carry a long-term earnings estimate, so a forward PEG would shrink the pool to almost nothing. It then layers on 13-week relative price strength, favoring names the market has already begun to reward instead of cheap stocks still falling.
What the ADR Screen looks for
- Only American Depositary Receipts qualify — the universe is limited to foreign companies listed in the US as ADRs.
- A PEG ratio — current price-earnings ratio divided by the five-year historical earnings-per-share growth rate — no greater than 1.0 and no less than 0.2. The ceiling removes expensive stocks; the 0.2 floor discards distorted readings thrown off by freak P/E or growth figures.
- 13-week relative price strength ranking in the top 50% of the entire database — recent price performance ahead of at least half of all stocks.
- 13-week relative price strength percentage rank at or above the median 13-week reading for the company's industry — beating its own peer group, not just the average stock.
Why it can work
The durable case here is diversification. ADRs open the door to economies and industries that run on different drivers than the US market, and doing it through a US-listed, dollar-denominated security keeps the mechanics simple. The GARP filter aims to capture that exposure without overpaying — as a group, the stocks that pass tend to carry price-earnings ratios slightly below the broad market. The relative-strength requirement helps with timing, steering toward foreign issues that are already outperforming rather than value names the market is still ignoring. Diversification is strongest in consumer-facing areas — household durables, real estate, beverages, business services — whose fortunes track their home country more than global trends.
What to keep in mind
An ADR tracks its home-market shares closely and carries currency risk on top of company risk. If the dollar strengthens against the local currency, a dollar-based investor keeps less of the return than a local one would, which makes ADR results more volatile. The data has quirks worth respecting: per-share figures depend on the conversion ratio — how many underlying shares one ADR represents, sometimes ten to one — so price ratios can mislead if the reporting basis is unclear. Foreign firms file 20-Fs rather than 10-Ks, and some report only semi-annually, so financials can lag. A historical-growth PEG is also easily distorted by a near-zero base year. And diversification thins out in global-commodity industries — mining, oil, chemicals, machinery, banking — where a foreign producer moves with the same worldwide forces as its US counterpart. A low PEG flags a candidate; it never explains why the stock is cheap.
Sources
One Up on Wall Street, Peter Lynch with John Rothchild, Simon & Schuster, 1989 — the popular reference for the PEG ratio and the growth-at-a-reasonable-price approach the screen applies.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.