Oxstones Investment Club™Stockpickers look to capture overseas growth by buying U.S. companies with big operations abroad. So far the strategy is paying off
American investors eager to profit from faster economic growth outside the U.S. can head to stock markets in Asia, Brazil, or Russia. Another option, closer to home, is to buy shares of U.S. companies with large overseas operations—a strategy the evidence suggests is paying off for many.
For example, Barclays Wealth operates an “Asian Fusion” investing strategy that includes only shares of U.S. companies with more than half their revenues from Asia. Barclays Wealth tells Businessweek.com that, from the private client product’s debut on Aug. 7, 2009, to Nov. 8, 2010, Asian Fusion holdings have risen 59 percent, 40 percentage points better than the MSCI World index of developed stocks.
Foreign trends have had a big impact on U.S. company results recently, says Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn. The strength of overseas sales, particularly those in emerging markets, is “one of the overriding themes from the third-quarter earnings season,” Sheldon says. “You see that in company after company and sector after sector.”
Upbeat Buying Trend
Freeport-McMoRan Copper & Gold (FCX), the world’s largest copper producer, saw revenue jump 24 percent from a year earlier in the third quarter ended September. The U.S. makes up just 9 percent of copper consumption, while China uses 40 percent, according to the International Copper Study Group. Emerging markets keep buying more, says Morningstar (MORN) analyst Daniel Rohr. Therefore “an investment in Freeport is really a bet on overseas [economic] growth,” he says.
Freeport shares are up 76 percent since major U.S. indexes’ lowest point of the year on July 2. The Standard & Poor’s 500-stock index is up 19 percent in that period.
Wynn Resorts (WYNN), the Las Vegas-based casino company, entered the Chinese market in 2006 with a casino on the island of Macau. Chinese operations now make up two-thirds of the company’s revenue. On Nov. 2, Wynn said last quarter’s revenue in China had jumped 50 percent from a year earlier, while Wynn Las Vegas saw revenue rise 3.1 percent.
“It’s really a concentrated play on China,” says S&P equity analyst Esther Kwon. “The growth opportunities in this industry are really in new markets,” while Las Vegas is plagued by too many casinos and hotel rooms, and not enough demand. Wynn shares have gained 54 percent since July 2.
Huge Portion of Sales
Half the U.S. large-cap companies in the S&P 500 don’t disclose exactly how much sales and profit comes from abroad. Of the other half, 47 percent of 2009 sales, or a total of at least $2 trillion, came from outside the U.S., according to an annual analysis by S&P issued in August.
Not all companies with heavy overseas exposure have excelled. For example, Colgate-Palmolive (CL), the consumer products company, derived just 19 percent of its sales from its North American division last quarter, but total worldwide sales were down 1.5 percent from a year earlier—with foreign currency fluctuations cutting revenue 4.5 percent. The stock is down 2.4 percent since July 2.
The rise or fall of the U.S. dollar can hurt or help U.S. companies doing business overseas. Barclays Wealth investment strategist Brian Nick says the rationale for the firm’s Asian Fusion strategy is not just emerging-market economic growth but the likelihood of appreciation in Asian currencies, which would boost profits when they’re brought home and reported in dollars.
Stir Fry Cooking
The Asian Fusion strategy is named for the cooking technique of “taking Western ingredients and cooking them in an Asian style,” Nick says. It’s part of a broader goal for the firm’s portfolios, which also include emerging-market fixed-income plays and mutual funds that buy local shares of foreign companies. “You should be looking to get exposure to emerging-market growth everywhere in your portfolio, even in places you would not normally look,” he says.
About a dozen U.S. stocks are held in the Asian Fusion strategy at any time, with managers buying only stocks and industries highly rated by Barclays equity analysts and, crucially, only those that get at least 50 percent of their revenue from Asia excluding Japan. Currently, the portfolio includes Intel (INTC), alternative energy company JA Solar Holdings (JASO), casino operator Las Vegas Sands (LVS), and wireless equipment maker Qualcomm (QCOM).
There are real risks to operating in emerging markets, and simply being a U.S. company doesn’t erase them, notes Douglas Cohen, head of Morgan Stanley Smith Barney’s strategic equity portfolio group. “It’s not easy to do business in a lot of these places,” Cohen says. The advantage goes to companies with deep, long-standing local ties in particular countries.
Megatrends That Count
Such U.S. companies as Dow Chemical (DOW) have placed an emphasis on emerging markets, saying their future lies in the exploitation of global trends linked to emerging markets and urbanization. In Dow’s case, that means energy, transportation, health and nutrition, and consumerism.
“All these megatrends are driven by tectonic shifts in global demographics that will continue to define this century,” said Andrew N. Liveris, Dow’s chairman and chief executive officer, in a Nov. 1 talk to investors. On Oct. 28, Dow announced that for the first time ever, more than $4 billion of the company’s quarterly revenue came from emerging markets, up 19 percent in the third quarter from a year earlier. North American sales made up 36.5 percent of $12.9 billion in total revenue in the quarter. Dow shares have risen 38 percent since early July.
Compared with their peers abroad, U.S. companies are often better managed, more transparent to investors, and importantly, “their valuations are actually more attractive than [those of] many emerging-market companies,” says Prudential Financial (PRU) market strategist Quincy Krosby. Since the beginning of the year, the MSCI Emerging Markets index is up 16.7 percent, while the S&P 500 has risen 8.8 percent.
Experts such as RDM’s Sheldon warn that, because many investors have already recognized the potential of emerging markets, the upside for such assets might be limited in the near term.
“Investing in emerging markets and companies geared toward emerging markets is certainly not an undiscovered investment idea,” Sheldon warns. The strategy makes sense, however, over the long term, he believes.
Steverman is a reporter for Bloomberg News .
Source: businessweek.com
Tags: Barclays Wealth, big operations abroad, Colgate-Palmolive (CL), emerging markets, Equities, Freeport-McMoRan Copper & Gold (FCX), Intel (INTC), JA Solar Holdings (JASO), Las Vegas Sands (LVS), north america, Qualcomm (QCOM), stock market, stocks, U.S. companies, U.S. stocks, Wynn Resorts (WYNN)