Sell Asia, Buy America

05/07/2010 3:53 pm EST


Jim Jubak

Founder and Editor,

On April 27, I decided to hold onto shares of Taiwan Semiconductor Manufacturing (NYSE: TSM) for a little longer. I thought the risk was relatively small and the up side to my target of 17% provided enough reward.

Well, the world looks significantly different two weeks later. Risk has gone up, and the reward for investing in Taiwan Semiconductor has gone down. The Taiwanese stock market has shown itself very susceptible to anything that roils China’s markets, and I think the direction of China’s stock market still points down for another few months at least, and the volatility of all emerging markets is on the rise.

I’ve got another reason for selling, too. As I noted in my post, the US economy continues to deliver solid and perhaps improving growth.

I’d like to increase Jubak’s Picks’ exposure to that US growth story, and selling an overseas stock such as Taiwan Semiconductor and buying a US stock like Whirlpool (NYSE: WHR) is one way to do that. So, I’m going to take advantage of today’s bounce, recovery, whatever, from yesterday’s huge plunge to sell this position. Jubak’s Picks is at break even on this stock since I added it to the portfolio on October 20, 2009.

On April 26, Whirlpool blew away Wall Street earnings estimates for the first quarter of 2010. Earnings of $2.13 a share came in a full 80 cents above Wall Street expectations. At $4.3 billion, revenue was up 19.4% from the first quarter of 2009 and about $600 million ahead of estimates.

And to top it off, the company told analysts to expect earnings of $8.00 to $8.50 for all of 2010. That was up from its previous guidance of $6.50 to $7.00 and above the Wall Street consensus projection of $7.08 for the year.

The stock soared on the news, rising $10.20 a share that day to an all-time high of $112.42.

Too pricey for me! I calculated a target price of $124 a share within 12 months. After the stock’s $10 pop, that left me looking at a potential return of 12.7% in a year. Not enough, given the economic and market risk right now.

But then the sell off that culminated (I wish) with the huge whoosh of May 6th gave me another shot. Whirlpool closed on May 6th at $102.90, giving back all its gains on the earnings and guidance news. On Friday, May 7th, it’s down further to below $100 near the close. So, I’m going to add this appliance maker to Jubak’s Picks with this column, with a target price of $124 by May 2011.

Let me be clear why I’m buying.

First, I think the US economy is showing solid growth. That was confirmed for me by this morning’s rising jobs numbers. (For more on those data, see my post) I think this maker of home appliances is a good way to play that economic recovery and the rising consumer spending that comes with increased confidence that the economy isn’t about to step off a cliff again.

Second, I think that as one of the last men standing in a consolidating global appliance industry—Whirlpool acquired Maytag in 2006—I think Whirlpool is positioned to pick up efficiencies of scale and to gain from growth in developing economies. Standard & Poor’s forecasts that operating margins will climb to 5.4% in 2010 from just 4.8% in 2009.

About 60% of the company’s sales come from North America. Europe, which the company is projecting will show no growth in 2010, accounts for 19% of sales, but the company’s second biggest market at 22% of sales is fast-growing Latin America. Whirlpool inked two joint ventures in China in 2008 and 2009 to manufacture refrigerators and washing machines in China for the domestic market as well as for export.

Full disclosure: I own shares of Taiwan Semiconductor Manufacturing in my personal portfolio. I will sell that position three days after this is posted. I don’t own shares of any other company mentioned in this post.

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