It’s Time To Tap Into Global Growth At “Sale” Prices

Lance Spicer, Editor - Trident Confidential, 18 Aug 2011, 2:06 PM

The stock market has not been easy to negotiate since 2007. We have seen the crash of 2008-9 and then the recovery after March 2009 and then hit two severe corrections mid year in both 2010 and now in 2011.

However, what many investors forget is that investing in the stock market is a long-term investment and does carry a degree of risk. Another important fact that many people seem to forget, is what the stock market is – it’s not just numbers on a page, but a market for companies. It’s a place where you can invest in a business and have a percentage of ownership, often not a large percentage, but nevertheless this entitles you to ownership of a proportion of the profits, a dividend and part ownership of everything the business owns.

When you look at it this way, it’s very important you buy a good company. That is a company that has strong management, a good financial position and most importantly growing sales and profits. In fact, you should view investing in stocks in much the same way as you’d consider buying a business for yourself. The last thing you would ever do is buy a business with falling profits and sales or, in fact, no sales at all. But, you’d be surprised how many people do just that when they invest in the stock market.

You see, Warren Buffett has always said he would be happy if the stock market just closed down for 10 years – because his businesses would just keep on going, producing growing sales and profits and building wealth. However, the stock market distracts us with it’s volatility, as we have seen recently. The prices some stocks have been valued at by the market have at times been ridiculous. At times like these you have to take a step back and consider that for the most part, what happens on the stock market has little effect at all on the operations of the businesses that are bought and sold on the market each day.

When you discover a great business with growing sales and profits, it’s at times like these that you have to act and buy when prices are low. It’s never easy because we often get caught up in the fear and hysteria that’s often generated. However, buying is exactly what savvy investors and fund managers do. They buy businesses when they are heavily discounted by the market.

At this point in time businesses are back in the heavily discounted price range if you look back at historical average Price to Earnings Ratios, in fact around 20-25% undervalued.

However, we have been hearing that growth is slowing, not only in Australia but in the US and Europe as well and this will obviously have an effect on business as sales and profits would also slow. This is not necessarily the case. There are always growing markets somewhere and it is those markets you have to “tap” into. Now, you may have instantly thought “China” and may have also thought “I don’t want to invest in Chinese companies”, but you don’t have to. You can invest in safe, well-run, extremely profitable businesses that “tap” straight into this growth. Now, we all know that a company like BHP is one such company but it brings with it “commodity price risk” and “foreign exchange risk” so even though it is linked with the long-term economic development and growth of China and other emerging nations, it is affected by the vagaries of commodity prices and a high Australian dollar which has a negative impact on profits.

So, the solution is to use the strong Australian dollar to your advantage while it remains high. As you well know, there has been much talk about the Australian economy softening and most banks and economists are now predicting a series of interest rate cuts. These cuts will reduce the strength of the Australian dollar and consequently will mean that any assets that you own in say US dollars will immediately appreciate.

The best way I see to invest, in not only emerging market growth and also global growth, is through US equities. Some people tend to shy away from owning “foreign” companies but the world has changed and many companies have become global in their outlook and many US companies are achieving record sales and profits even in these weak economic circumstances. How are they doing it? By selling their products and services to growing middle class populations in China, India, Brazil and other emerging countries, something other than mining companies, Australian business has often failed to do.

Almost all of the S&P500 companies in the US have reported their latest quarterly results and they have been stunning. In fact, for the last 10 quarters the S&P500 companies have racked up increased sales and profits and consistently beat analysts estimates. This quarter has been no different with stunning profit and sales growth performance. What’s more it’s set to continue, with many companies lifting already optimistic forecasts higher for the coming quarter. These are the businesses you need to invest in now while prices are low.

You may think that this may not make sense, as we have all heard that GDP growth in the US is slow, but these companies are exporting to emerging economies who are growing and that’s what’s important. We have now heard the US Federal Reserve Governor Ben Bernanke has said that US interest rates will remain low for at least two years – this is music to the ears of US exporters, as this means the US dollar will remain low and exports for these companies will remain strong. While the US economic recovery may remain slow, the profits of these companies will remain at, or close to, record levels for years to come. This will not go un-noticed by investors forever.

The recent earnings reports from companies like Apple, Intel, IBM, Google and Cummins have been stunning and their CEO’s are very optimistic about the future. These are household names around the world and to give you an idea of their value:

Statistics correct as at 15^th August 2011

As you can see, it would be very hard to find too many Australian companies with value as good as these, particularly when you consider all these companies are “world dominating” companies within their market.

At this time, it may be prudent to consider companies such as these for your portfolio, not only as a way of taking advantage of what many consider an overpriced Australian dollar, but also as a great investment in emerging markets without being exposed to high risk. What’s more you’ll be buying a share of a business that is rated #1 in their field in the world at a time when they are “on sale”. Investing in them is easy and our recommended broker can assist you to get started at amongst the lowest rates available. 

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Lance Spicer is the Editor of Trident Confidential (www.tridentconfidential.com) an Australian stock market newsletter focusing on growth stocks in the US and Australia. He is also the Fund Manager of The Trident Global Growth Fund (www.tridentinvestment.com.au)