The importance of global diversification cannot be overstated. Not only does it expose investors to the blistering speed of the developing world's economic growth, but it also insulates stock returns from regional economic downturns like the Great Recession. Without a doubt, it is one of the principal keys to successful investing in modern times.
The safest and easiest way to do it is by investing in American companies with significant operations abroad. Of particular interest on that front is Starbucks (NAS: SBUX) , the coffee chain that's spearheading the international coffee revolution.
The promise and perils of investing abroad
The most obvious reason to diversify globally is to gain exposure to the developing world's economic growth. Over the past decade, emerging markets have expanded much more quickly than the developed world has. South Asian economies, led by India, have more than tripled their output since 2000. And if you take Japan out of the equation, the East Asian economies have done the same, going from $3.3 trillion in 2000 to $11.2 trillion in 2010. In fact, North America is the only continent that hasn't at least doubled its economic output since the turn of the century.
Source: World Bank.
Source: World Bank.
Global diversification also acts as a hedge against regional economic downturns, a benefit that revealed its advantage in 2009. Triggered by the financial crisis, output in North America and Europe shrank that year by 3.4% and 4.3%, respectively. Yet South Asian economies simultaneously grew 8.1%. And while output in the entire East Asian and Pacific region contracted by approximately 1%, weighed down by Japan's 6.3% decline, the region's largest economy in China grew a staggering 9.2%.
These two benefits aside, however, it's important to remember that investing directly in international markets is risky. Just recently, for example, a wave of fraud has washed over Chinese small-cap stocks, costing investors billions of dollars. A typical example is Chinese Internet security software maker Qihoo 360, which saw its shares lose more than 20% of their value by the middle of last month because of questionable accounting practices. Even the most sophisticated of investors were caught in the undertow, as famed hedge-fund manager John Paulson purportedly lost more than $100 million when Chinese forestry company Sino-Forest was revealed to be a fraud.
The best of both worlds
The most effective way to balance the benefits of global diversification without exposing your portfolio to undue risk, in turn, is to invest in American companies with global exposure like the three identified in our free report: "3 American Companies Set to Dominate the World." In addition to those three, two more that come to mind are Yum! Brands, the fast-food operator that got 43% of its 2010 pre-tax profit from China, and Wal-Mart, the global retail giant that looked abroad for a full 32% of its sales last year. Though undoubtedly one of the best in this regard is Starbucks, the ubiquitous coffee chain from Seattle.
There's simply no question that Starbucks is the unrequited king of coffee. In many cities, it seems there's one on every street corner, and understandably so, as it's added an average of two stores a day since 1987. While the average Starbucks customer visits a location six times a month, a full 20% of them go every other day. It's estimated that the company uses 2.3 billion paper cups a year. And its logo is so well recognized that it doesn't even put its name on those cups anymore. That's what you call powerful brand recognition.
Source: Starbucks Investor Relations.
Source: Starbucks Investor Relations.
It should accordingly be no surprise that Starbucks has an extensive global footprint. At last count, the coffee chain operates in 55 countries, employs more than 130,000 people, and has approximately 17,420 locations worldwide. Its single largest country-specific presence outside the United States is in Japan, where is has 955 locations. And its biggest international regional presence is in Asia, where it has 3,050 stores and counting. According to CEO Howard Schultz, "The No. 1 opportunity for the entire company is China," which is slated to become Starbucks' second largest international market by 2012, at which point it aims to operate more than 1,500 stores, roughly triple the amount now.
It's this diversification that's contributed to both the company's growth and the fantastic performance of its stock price. Despite the Great Recession in the developed world, since 2007, its total revenues have grown a staggering 24%, from $9.4 billion to nearly $12 billion in 2011. In the most recent fiscal quarter alone, the company reported an 18.5% quarterly increase in its net income.
And not surprisingly, its stock price has responded in kind. Over the past five years, an investment in Starbucks returned nearly 90% for shareholders, beating the broader market by a whopping 80 percentage points. It's eviscerated its competitors over the past year: Following its 2011 IPO, shares in Dunkin' Brands (NAS: DNKN) are up a comparatively modest 18%, while Green Mountain Coffee Roasters (NAS: GMCR) has seen its share price lose more than 65% of its value amid rumors of financial shenanigans. And both Peet's Coffee & Tea (NAS: PEET) and Caribou Coffee (NAS: CBOU) , while up by double digits, are far behind the twin-tailed siren.
Foolish bottom line
There's no question that Starbucks has problems. At the end of March, for example, Starbucks admitted to using crushed insects as coloring in some of its drinks. Yet its globally diversified operations should serve to both preserve and grow investment capital over the years to come. And it's for this reason that I agree with my colleague Alyce Lomax that Starbucks is a good stock for the long term.
For a handful of other companies like Starbucks, check out that recently released free report I mentioned about three American companies set to dominate in emerging markets. Among others, it discloses the identify of a stock that's doubled in the past few years and still pays an atypically generous dividend yield. Access this report while it's still available -- it's free.
At the time thisarticle was published Fool contributor John Maxfield has no financial interest in any of the companies above. The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Green Mountain Coffee Roasters and Starbucks, writing covered calls on Starbucks, and creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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