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12 global growth stars you've never heard of
If you really want growth, you'll have to stray outside U.S. borders. Developing countries with younger populations are outpacing the developed world.
By Jim Jubak
It's time to go global in my periodic quest for "stealth blue chips," an effort I launched a little more than a year ago.
These stocks would have all the characteristics that investors want in a blue chip -- without the big price tags. So far, I'd call the portfolio of 11 stocks a success: The worst gain since I picked these stocks on Oct. 14, 2003, is 2.7% from Kinder Morgan Energy Partners (KMP, news, msgs). The best gain is 107.9% from Penn National Gaming (PENN, news, msgs). The average gain for the 11 picks is 30.9%. (To get a complete list with purchase price, see chart on page two.)
All 11 are U.S. companies and each will thrive or dive with the U.S. economy. In today's column, I'll pick 12 stocks whose fortunes are pegged to the global economy. I'm calling this portfolio, which I plan to regularly revisit, my "global stealth winners."
Where the growth is
Why go global now? Simple. It's where the growth is. The U.S. economy grew at somewhere between 3% and 4% in the last quarter of 2004 (depending on how a statistical snafu in Canada works out). Most economists think the sustainable rate of growth in the U.S. economy is somewhere around 3% a year. That's great -- for what's often called the developed world. Europe is growing at around 2% at best, and some of its key economies are growing at rates close to zero. Japan is in roughly that same boat.
But U.S. economic growth is anemic by the standards of what's still called the developing world. India and China both topped 8% in 2004 and seem able to keep matching or beating that rate in 2005 and well beyond. Even countries we aren't accustomed to putting in the "growth" category are outgaining the United States. The Philippines is looking at growth of 5% to 6% in 2005. Even Mexico, with all the structural problems that its economy has, is likely to outgrow the United States over the next decade.
Those numbers aren't magic or some international conspiracy. They're the result of demographics. In the long run, the growth rate of an economy is simply the sum of the growth rate in population and the growth rate of productivity. Countries with younger, faster-growing populations have a leg up in the economic growth race.
4 themes to play
General investing themes for making a profit out of this higher level of growth in the developing world aren't hard to find. I think these four, for instance, will be immediately recognizable.
First, there's the financial-services play. As income rises in countries such as China and India, the population will consume more Western-style financial products such as credit cards and life insurance. Increased income also means increased consumption of consumer goods and services, such as travel and processed foods. Growth will drive demand for technology products such as digital cameras and the flat screens that go into laptop computers. And all this economic growth requires huge growth in infrastructure and leads to increased consumption of raw materials such as cement, iron ore and oil.
Because those four themes aren't especially arcane or complex, the obvious big-cap ways to profit from them have already been bid up -- not always to prices that make them ridiculously expensive, but to prices that are higher than those commanded by less-familiar stocks. So, for example American International Group (AIG, news, msgs), one of the great financial-service plays on Asian growth, trades at 16 times trailing 12-month earnings. But Prudential Financial (PRU, news, msgs), one of the most successful sellers of life insurance and annuities in Japan and Korea, is much less familiar to investors looking for global growth -- and it trades at a lower 13.8 times trailing 12-month earnings.
If you believe that the developing world will show superior economic growth to the developed world over the next decade and more, you certainly ought to own the big names: AIG, HSBC Holdings (HBC, news, msgs), Citigroup (C, news, msgs), Wal-Mart Stores (WMT, news, msgs), Companhia Vale Do Rio Doce (RIO, news, msgs), Rio Tinto (RTP, news, msgs), BHP Billiton (BHP, news, msgs), Peabody Energy (BTU, news, msgs), Bunge (BG, news, msgs), PetroChina (PTR, news, msgs) and CNOOC (CEO, news, msgs).
But if you're willing to take a little more risk -- and let's be honest, owning Prudential Financial is riskier than owning AIG -- and own the less well-known, "stealth" global-growth stocks, I think you can pull in higher gains that will more than compensate for the higher risk.
12 'stealth' global winners
I've divided my 12 stealth global winners into four categories that correspond to the big, familiar investing themes that I outlined above.
Theme No. 1: Growth in consumption of Western-style financial services rises as incomes climb in the developing world.: After 15 years of operating in Japan, the company's Life Planner marketing program sells more life insurance/annuities per agent than any competitor's marketing platform. And Prudential is rolling it out to new cities in Japan and Korea.
Kookmin Bank (KB, news, msgs): The largest lender in Korea holds a sizeable portfolio of loans to small- and medium-size business. As a major partner in China's economic expansion, Korea's Kookmin Bank is a safer way to play the growth in China's financial sector than China's own banks. The Wall Street consensus projection on Kookmin's long-term earnings is for 14% annual growth.
ICICI Bank (IBN, news, msgs): ICICI Bank continues to make progress in its transition to an Indian retail consumer bank. In the December 2004 quarter, retail assets grew by 63%, fee income grew 83% and after-tax profit climbed 18% (from the same quarter in 2003).Theme No. 2: Increased consumption of Western-style consumer goods and services as incomes rise.- Accor (ACRFF, news, msgs) or Accor Asia Pacific: Europe's largest hotel group is driving into China where the company is starting to open budget-priced Ibis hotels to go with its luxury Sofitels, its four-star Novotels and its three-star Mercure properties. In the fourth quarter of 2004, revenue rose (ex-currency effects) by 5% as weak revenue in Europe (because of the decline in the U.S. dollar) was offset by revenue from new hotels (read Asia). Revenue in the company's travel-agency business climbed 14%.
- San Miguel (SMGBY, news, msgs): The Philippines' largest food-and-beverage company has its sights set on the rest of Asia. Currently the company is embroiled in a fight to buy National Foods, Australia's largest dairy company. Besides Australia, San Miguel has announced intentions to expand in China, Thailand, Malaysia, Indonesia, Taiwan and Vietnam
- Corn Products International (CPO, news, msgs): As incomes rise, so does the demand for processed sugars -- like it or not -- as sweeteners in soft drinks and processed food. About 18% of the company's sales are from Asia and Africa now, but Corn Products has targeted China, Pakistan and Thailand for expansion.
Theme No. 3: Global economic growth creates . . .
Continued on Page 2
Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Cell Genesys, ICICI Bank and Talisman Energy. He does not own short positions in any stock mentioned in this column.
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