Where Should You Invest? This Indicator Will Tell You.
If you're a global investor, it pays to pay attention to the big picture. Picking where to invest can be just as important as picking what company to invest in.
For example, Specialty Fashion Group is an Australian retailer I respect. It's earning better-than-30% returns on capital, and in better times, it posted steady operating margins and tight cash conversion cycles. Yet the company has not been able to escape Australia's weak consumer environment. The stock has fallen steadily of late, because of slowing sales and contracting margins. (Still, value investors with access to the Australian exchange may want to note that it's now trading for less than three times EBITDA, and paying a 10% dividend yield.)
I highlight SFG here because it's a quirky case. Australia, thanks to rising prices for oil, iron ore, and its other natural resource exports, appears to be doing well, posting 3.3% GDP growth in 2010 atop a surging currency. That strength, however, has come on the back of a mining boom, which has enriched just a tiny percentage of Australia's larger workforce. Strip out mining, and Australia's not doing so hot.
Four out of five economists agree
That somewhat complicated situation could catch individual investors -- those without the research budgets to subscribe to reams of economic data -- by unpleasant surprise. What simple, reliable, and cost-effective resources can everyday investors use to avoid this pitfall?
The Internet offers a tidal wave of free opinions -- but one often gets what one pays for. Depending on what you read and whom you talk to, China alternately is the biggest bubble in history, or not a bubble at all; gold is about to become the world's most reliable currency, or the worst investment ever; and the U.S. is either the safest place to invest in an unstable world, or the reason the world has become so unstable.
No matter how much you read, you may still be unable to answer the simple question: "Where should I invest?"
A simple but effective indicator
Cigarettes are much-maligned for their health hazards. But sales of cigarettes -- an addictive and relatively affordable product -- are a pretty good real-time indicator of who is and who is not feeling financially secure. That's why the earnings report I look forward to each and every quarter comes from Philip Morris International (NYS: PM) . If you read closely, PMI isn't just telling you about itself, but also providing insight into consumer behavior.
Consider, for example, the case of Europe in 2008. Philip Morris began showing evidence of consumer downtrading as early as the third quarter, with operating income growth lagging net revenue growth. That trend turned into harsh reality in Q4, with it's the company's EU division reporting an 8.6% decline in shipment volume. Consumer downtrading further resulted in a 12.4% year-over-year decline in operating income.
As we all know, Europe has been a horrible consumer market for more than two years now. Watching Philip Morris could have helped you trim your exposure ahead of the rest of the market. As for what's happening now, PMI's most recent results showed some revenue stabilization in Europe, as well as improving margins associated with higher pricing and uptrading in markets such as France and Germany. As you might expect, however, Spain, Greece, Portugal, and the U.K. continue to struggle. Adjust your portfolio accordingly.
A more important trend
The most informative part of PMI's most recent results, however, had nothing to do with Europe, and everything to do with Asia. Revenue (currency neutral) was up almost 28% in the region, and operating income increased almost 50%. This shows that consumers in key Asian markets -- notably Indonesia and Vietnam, according to the company -- are not only accepting higher prices, but trading up to more premium brands. This is clear evidence that this part of the world is starting to feel more financially secure.
But Philip Morris isn't the only multinational with results indicating wealthier Asian consumers. Coca-Cola (NYS: KO) bested expectations in its most recent report, thanks to 21% volume growth in China, and YUM! Brands reported incredible 18% same-store sales growth in the country .
Each one of these companies is recently outperforming, thanks to the the market's underestimation of how well emerging-market consumers in Asia are doing.
The global view
Of course, if you read the papers, it's easy to underestimate emerging-market Asian consumers. China's looming banking crisis, the story goes, is about to destabilize that entire hemisphere. But from Philip Morris to Coke to YUM!, consumer numbers for the region tell a different story. That tale could make you a nice investing profit.
Could the tide turn? Of course -- but that's why you should keep a close eye on Philip Morris International's quarterly reports. If demand for premium branded cigarettes in the region begins to decline, you'll know a slowdown is nigh.
At the time this article was published Tim Hansonis co-advisor of Motley Fool Global Gains. He owns shares of Philip Morris International.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International, Coca-Cola, and YUM! Brands. The Motley Fool owns shares of Coca-Cola.The Motley Fool has adisclosure policy.
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