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How to Buy the Next McDonald's
10/23/2009 11:18 am EST
As emerging market nations develop into consumer economies, they'll spawn new global brands that make great long-term investments. Here are five stocks with stellar prospects.
By 2015, one-third of companies in the Financial Times Global 500, a list that's roughly the global equivalent of the US Standard & Poor's 500 Index, will come from the world's emerging markets, according to business consulting firm Bain.
Makes sense to me. Economic growth in general is higher in the world's developing economies, such as those of China, India, Brazil, and Indonesia, than in the developed economies of the US, the euro zone, and Japan.
The growth differential is even greater when you look at just that part of the global economy that consulting firm McKinsey calls fast-moving consumer goods—soft drinks, laundry detergent, frozen pizza, etc.—exactly the segment of the economy that spawns the brand names that give a company the kind of broad-based popular recognition that translates into a big stock market capitalization. Compound annual growth in fast-moving consumer goods in developed markets for the period from 2005 to 2010 will average 4% for developed economies, according to McKinsey. Germany, at 3%, will be slightly below average. The US and the United Kingdom will be slightly above average at 5%.
Compound annual growth for fast-moving consumer goods in developing economies is forecast at 10% overall and 11% in China and India. The forecast for Indonesia is 16%.
And there's more trending in the direction of increased representation for emerging markets among the list of the world's biggest companies than just that big growth differential. As if that weren't enough.
Global cash flows are moving in the same direction. Global financial assets had climbed to $167 trillion by 2006, up from $43 trillion in 1990, according to McKinsey. Emerging markets accounted for $24 trillion of the 2006 total. That's more than half the global total in 1990. Among emerging markets in 2006, China accounted for $8 trillion, other parts of Asia for $11 trillion, and Eastern Europe for $3 trillion.
The flow of global financial assets toward emerging markets has still left them underrepresented in the financial markets. In 2006, emerging markets accounted for 23% of global gross domestic product but just 14% of global financial assets.
By this point, your question should be, "How do I get in on this trend?"
It's hard. Don't kid yourself. Investing in emerging markets can be like walking through a minefield and guided by a map with huge holes in it, but I think it is possible with enough hard work and an understanding of the terrain.
First, three problems:
- In the US economy, often it's who you know rather than how well you run your business that matters. That's even truer in emerging markets. In Brazil, the legislature is debating how much of the new oil discoveries made by Petrobras (NYSE: PBR) should go to the government, and, perhaps, a new national oil company. In China, the government just completed reshuffling the assets of the country's largest mobile phone companies to "increase competition."
- In the US, the path from private company to publicly traded company is relatively straightforward. In developing markets, such as India, family-controlled companies often spin off a bit of themselves to the public market, giving shareholders the right to participate in ownership but leaving control effectively in family hands. China presents its own wrinkle on this in the form of state-owned companies and companies controlled by local governments or institutions such as the People's Liberation Army.
- In some countries, such as India and China, whole markets are effectively off limits to international investors. You may want to own shares of phone company Bharti Airtel, for example, but unless you open an Indian brokerage account, forget it.
But there are some offsetting advantages, too. Here are three:
- Patience counts. The rise of the globe's emerging financial markets and of global brands and companies from those markets is a long-term trend. You've got plenty of time to do your homework and still get in on the trend. This one is going to run for a while.
- There are lots of different vehicles to use to invest in this trend. If researching and picking individual company stocks are daunting, how about buying into a bank that invests in the sector, like Standard Bank Group (OTC: SBGOY) of South Africa. Or how about an actively managed mutual fund such as Matthews India (MINDX) or an exchange traded fund like Market Vectors Brazil Small Cap (BRF)? (For more on Market Vectors Brazil, see my blog post about it.)
- Even the extreme volatility of emerging financial markets works to the benefit of the patient investor. You'll get lots and lots of chances to buy in cheaply as these markets crash and soar around a trend line that is climbing on average.
This last point is worth exploring in more detail.
Since we're looking for the next McDonald's, let's start by looking at the history of McDonald's (NYSE: MCD) share price. In January 1970, McDonald's traded at a split-adjusted 31 cents a share. By January 1975, the stock was trading at $1.06. That's a very tidy threefold gain in five years.
But it wasn't always smooth sailing. By January 1980, McDonald's had climbed from $1.06 to . . . $1.06. That's right: Five years of treading water for investors. By 1985, the stock had resumed its climb, selling for $3.17 that January.
And then McDonald's was off to the races: $7.94 in January 1990, $16.63 in January 1995, and $40.31 in January 2000.
I see a lesson there: The biggest gains go to the investors who bought cheaply. And it doesn't matter if you didn't catch the exact bottom. A run from 31 cents in 1970 to $40.31 in 2000 is stupendous. But I'd certainly take the profits from a move from $1.06 in 1980 to $40.31 in 2000.
Looking at the price history of a stock such as Krispy Kreme makes the same point, even though the stock's price chart is the inverse of McDonald's.
Krispy Kreme (NYSE: KKD) went public at $11.50 a share in April 2000. It wasn't immediately apparent as investor enthusiasm drove the price up to $44.20 by December 2001, but that initial price was too expensive. By April 2005, the stock was down to $5.92 a share. It was trading at $4.33 as I wrote this column.
Considering the risk that any stock with world-beating potential will turn out to be a dud or just a mild disappointment, investors should try to buy McDonald's cheap instead of Krispy Kreme expensive.
That is why I would hold off on buying any emerging market stock right now. Not because they're about to crash. (Gee, I hope not. I added Market Vectors Brazil Small Cap to the Jubak's Picks Portfolio not so long ago.) But because sometime in the next 12 to 18 months, once the Federal Reserve starts to talk seriously about raising interest rates, I'll be able to get these cheaper.
If my arguments above convince you, you ought to devote that time to researching potential global brands among emerging market stocks.
What stocks? Here are my five candidates for global brand potential among the emerging-market universe:
- Ctrip.com (Nasdaq: CTRP), the number one online travel company in China.
- Li & Fung (OTC: LFUGF), a convenience store (Circle K), logistics, and outsourcing giant. Recent acquisitions have moved the company toward branding. Maybe.
- Ping An Insurance (OTC: PIAIF). The company's biggest competitor in China's insurance market was American International Group.
- United Spirits (Mumbai listing only: UNSP), one of three largest liquor companies in the world and number one in India.
- Jain Irrigation Systems (Mumbai listing only: 500219), a specialist in low-tech but highly efficient irrigation systems.
You won't be able to buy the two Indian stocks unless you have an Indian broker. India is gradually changing its restrictive market rules for overseas investors, but movement is slow.
But there's usually more than one way to invest in these emerging market companies. For example, you can get shares of Jain Irrigation by buying Matthews India mutual fund.
I never said getting emerging market exposure to these potential global brand names was going to be easy. But it is worth the effort.
At the time of publication, Jim Jubak owned shares of the following ETF mentioned in this column: Market Vectors Brazil Small Cap.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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