British Small Caps Ready to Take On the World
LONDON -- Forbes recently released its Global 2000 for 2012, a list of the 2,000 largest public companies in the world. The list is full of names everyone knows, including FTSE (INDEX: ^FTSE) heavyweights Royal Dutch Shell (NYS: RDS.B) , the fourth-largest company in the world; BP, ranked No. 11; Tesco, coming in at 117; and Diageo (NYS: DEO) , ranked No. 254.
But that wasn't the part that interested me.
Beneath the headlines
As an investor, I'm more interested in some of the less obvious information a list such as this provides. According to Forbes, the combined revenue from the 2,000 companies on the list equalled $36 trillion -- more than the combined GDPs of the EU and U.S. -- while profits totalled $2.64 trillion for a profit margin of 7.3%.
At the same time, the combined market cap for the Global 2000 was $37 trillion, indicating a price-to-earnings ratio of 14 for an index of the 2,000 largest companies in the world.
However, if we look only at the 89 companies on the list that call the U.K. home, the profit margin rises to 8.4%, while the P/E falls to 12.6. This would seem to indicate that British companies are more attractively priced than their global peers. Of course, separating a few trees from the wood, we see quite an array of stories.
British American Tobacco (NYS: BTI) -- the 175th company on the list -- trades on a P/E of 20, which appears to me a bit exaggerated, given the relative growth prospects of tobacco companies.
However, I can't argue with investors attracted by the healthy and well-covered 4% dividend yield. It is also reassuring, if a bit confusing, that almost none of the company's sales come from either Britain or America, but are instead driven by the growing consumer classes of Asia and Africa.
On the other hand, you have AstraZeneca (NYS: AZN) -- ranked No. 142 -- carrying a P/E of six and a yield of 6.1%. The market fears the pharma group's development pipeline has run dry and wonders whether the company will be able to replenish its crop of blockbuster treatments as they lose their patent protections.
When tomorrow comes
I recognize there could be opportunities worth investigating among Britain's big names -- I mean, many blue-chip shares can be relatively safe, stable places for conservative investors to put their money.
Certainly dividend expert Neil Woodford has reaped the rewards from backing large caps, and this free report -- "8 Shares Held By Britain's Super Investor" -- tells me he owns many names on the Global 2000 list.
That said -- and with due respect to Mr. Woodford -- I'm more interested in growth! I want to find the companies that will be at the top of this list in five or ten years!
For example, Volkswagen has climbed from No. 129 in 2007 to 17 this year, thanks mainly to more than doubling its sales to South America and the Asia-Pacific region.
Then you have companies such as Burberry, which leapt onto the list for the first time, thanks to a growing network of retail outlets and strong demand in China.
In my view, it is the companies that haven't yet been promoted to the Forbes Global 2000 that will provide investors with the biggest returns over the next decade.
The ones I'm watching
I've pinpointed two companies that I think have the potential to make a run at the big boys.
The first is Ted Baker, a small fashion house that is in the early stages of global expansion. Its floor space in the U.S. increased by 24% last year and by 34% in other markets outside the U.K., but Ted's domestic market still represents nearly 80% of total sales.
The current expansion push trimmed margins and cash flow in 2011, but if the style catches on in the States and elsewhere, we could see Ted giving Burberry a run for its plaid-clad shoppers. A recent jump in the share price has made Ted a bit pricey at the moment, but this is definitely a business to watch.
The next company is set to ride the interconnectivity wave -- or, as it is more commonly known, the "iPad wave." Anite tests phones and phone networks to make sure everything works to plan.
As we (slowly) move toward 4G mobile networks (with the speed and capacity to support widespread use of mobile broadband), phone designers want to ensure their new models function, so they hire Anite's labs to run the phone through the works.
Network providers also use Anite's tools to make sure their towers communicate well with each other. As carriers upgrade their networks with 4G equipment, they should be able to improve efficiency and reduce cost.
Anite may look expensive at first glance, but the potential growth in demand for its technologies in the coming years makes its high multiple easier to justify -- and could land it in the Global 2000 a few years from now.
For many football fans at this time of year, the focus necessarily shifts to the promise of the next season, but investors should always be thinking ahead -- especially many years down the road.
How can we invest in the next big thing? Which companies will be making their mark on the world in five years? I've given you two companies I reckon people will be talking about in the years to come, but there are plenty more out there.
And I shall do my very best to bring them to your attention on The Motley Fool.
Nate Weisshaar is an analyst at Motley Fool Share Advisor, our premium share-tipping service that provides two top investments each month. Try it out today with our 30-day free trial.
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