Less now that they would have been were he still on his currency manipulation kick. But Beijing and Washington agree now that they want the Chinese to be better consumers.
In a related development, Michael Pettis opines on why the Chinese are savers and not spenders. Is really Confucius's fault?
China's investment in Latin America is showing substantial increase. What does this mean? Well, look out for some good growth in the Peruvian economy. That country just signed a free trade agreement with China and the opening of the IIRSA Highway connecting the Pacific coast of Peru with the Atlantic coast of Brazil will turn Peru into a crossroads for trade between Brazil and China. Incidentally, China recently surpassed the US as Brazil's largest trading partner. [more]
Don't worry everybody, they've double-checked their numbers, and they're cool. And next time you want to ask some questions, remember that they ask their own questions.
In other breaking news, Tim Geithner double-checked his work and has verified he's got this all under control. Good talk.
Seriously. Maybe KJI is smart enough to stay away from remote cornfields. Or maybe not.
Thursday morning has arrived again, making it time for another Global Gains team Champion of the World contest idea. This one comes from the mind of Nate "The Snake" Weisshaar. This is him teeing off in Macau (by the way, the slope on that Macanese mini golf course has got to be approaching 155):
But before we get to the premium content, allow me three plugs:
1. If you haven't, now's the time to join this CAPS Champion of the World Contest (rules are here). It's totally free, and you can win fabulous prizes.
2. If you haven't, now's also the time to sign up to become a Global Gains member. You can try it free for 30 days, our picks are 5 percentage points ahead of the market, we're on a bit of a hot streak (ask any of our current members), and we're headed back to China for research in July.
3. Leopold's American Small Batch Gin. Wow. [more]
Enough said. Insert joke about "decoupling" here. (From Bloomberg via DealBreaker.)
The Shanghai market is slammin'. Has the next investing bubble begun? [more]
The Global Gains CAPS Champion of the World Contest continues this week (week 2), and I’m back to laud the leaders and offer some words of encouragement and advice to the laggards. But before I get to that I’m compelled to remind you that if you’re not in it, you’re not going to win it. So sign up here now.
The top of the heap
After two weeks, IBDvalueinvestin remains the top spot thanks to a massive bullish bet on the emerging markets and some timely outperform calls on troubled Irish banks (AIB and IRE) and notoriously debt-laden bulk shippers (whose fortunes ebb and flow with global trade). Will IBDvalueinvestin be able to sustain this quick rise to the top or will risk-adjustment and mean-reversion rear they’re ugly heads over the course of the year? Only time will tell. Here’s how the rest of the top 5 round out.
(By the way, if ee cummings lived in the Internet age, he would not be revolutionary.)
By the way, look for bigroosterdaddy to make a move if we continue to see a rebound in metals prices. He’s taken a big bullish position in metals and miners, though he did give a big thumbs down to diamond-miner Harry Winston (HWD) that goes against the general gist of his sentiment. (Perhaps he’ll see this post and be compelled to respond.)
The not top of the heap
Down on the other hand we have…
These folks have generally made wrongway bets on leveraged ETFs, most of which are not actually tagged with the “international” label (as stipulated by the rules). The lessons, as always, are follow the rules and don’t mess with leverage. Further, folks looking to make up ground might want to take a look at companies that will help clean up the water supply in China. Now that’s an opportunity.
Look for another GG team idea to be posted on this blog Thursday in the AM. Holla. [more]
Sometimes in this business you don't find ideas as much as ideas find you. So it went last week when I received two independent, very interesting emails hitting on the same big idea. The first was from a money manager friend of mine who thought I should take a look at Hyflux and Epure, two Chinese wastewater treatment companies listed in Singapore. The second email was from my dad, a chemist and avid reader of trade publications, who was forwarding me an article from Chemical & Engineering News (what? you don't subscribe?) called "Cash Flows From China's Water."
The article's teaser tells you why it made me that much more interested in Hyflux and Epure: "In this highly populated, rapidly industrializing country, water purification is becoming a big business."
There are some pretty incredible statistics quoted in that article about the amount of cash China expects to spend on water treatment and infrastructure to support its enormous population centers. And while the article mentions multinational beneficiaries such as Dow Chemical (DOW) and General Electric (GE), if you know anything about China, then you know that the companies that are going to benefit the most in the long run are domestic Chinese companies. According to the article, these companies are not major players yet and still rely on foreign technology ("Local Chinese firms are emerging as competitors, he says, but these companies still need to buy many of the key raw materials from foreign suppliers such as Ciba."), but you have to think they're getting better.
Anyway, this seems like a very investable idea, provided you can pick the right plays. Thanks to all of my sources. [more]
If you're in Singapore, I recommend you find your way to Sinma. It takes a lot of frog to fill you up, but it tastes pretty good going down. [more]
We were doing some work at Global Gains to figure out where the cheapest market was these days. It seems the market is still underpricing risk. Use this data as you will, though it may influence some sector bets in the CAPS Champion of the World Contest. I don't know about you, but I'm immediately intrigued by Turkey and Indonesia.
Data as of 5/21/09. Source: Motley Fool Global Gains research. [more]
New Jersey gaming regulators have directed MGM (MGM) to sever its ties with Pansy Ho, the company's business partner in the MGM Grand Macau. US regulators have long questioned whether or not the Ho family are legally able to be tied to US based casinos given that Ho family patriach Stanley Ho -- the kingpin of gambling in Macau -- has a rather colorful past including alleged links to triads (Asian organized crime syndicates). This ruling could have wide implications for other multinational companies, such as James Packer's Crown, who have sought to do business in the US as well as partner with the Hos in Macau (Melco Crown (MPEL) is a JV between Packer and Lawrence Ho).
Macau has cleaned up its act over the years as it seeks to become a major (in some cases, family friendly) tourist destination -- the likes of Las Vegas -- in Asia. But is also has a long way to go. Ho family crime connections are one hurdle, and things that are common to both LV and Macau, such as prostitution, are more in your face in Macau than in Vegas.
It should, however, be interesting to see what MGM does here. The company spent a lot of time, money, and effort to enter the high-potential Macau market. Their next step will be an interesting indicator of how much they value Asia's potential vs. the US present and their existing core business. [more]
It's Thursday in the AM (eastern), which means it is time for the next stock idea from our Global Gains research team eligible to be rated in the CAPS Champion of the World Contest. Remember you need to rate at least one of our team ideas and one of your own ideas each quarter to be eligible to win. [more]
That is Itaipu Dam on the Parana River between Brazil and Paraguay, which we visited during a Global Gains research trip at the end of 2007. It started generating electricity in 1984, and generated more than 94 thousand GWh of juice in 2008 which were split 50/50 between Paraguay and Brazil, but most of which Paraguay sold back to Brazil at below market rates (as per a treaty between the two countries). [more]
Yongye Biotechnology (YGYB.OB) is a small Chinese fertilizer company I follow (and own shares of). They recently completed a secondary offering to raise working capital to meet excess demand the company was seeing for its products. The offering was mildly dilutive, and it got me wondering. After all, state-controlled Chinese bank lending in Q1 2009 was (and this is an understatment) rapid. According to reports, "China's total new lending in the first quarter was 4.58 trillion yuan, up 244.4 percent from the same period in 2008, according to figures from the central bank. In March alone, Chinese banks issued 1.89 trillion yuan of new loans, a new monthly lending record" [emphasis added]. [more]
The big news out of Latin America this morning is that Brazilian food processors Sadia (SDA) and Perdigao (PDA) are merging. You may remember Sadia for its epic $400mm currency "hedging" loss by a few "rogue traders" that essentially crippled the company. [more]
That's Erin. A few minutes after this photo was taken, the skateboard wheels rolled over her hair. Good times. Just wanted to put that out there. Now, onto the CAPS Champion of the World Contest update! (If you haven't entered yet, what are you waiting for. Full rules are here.)
The current Champion of the World Top 5 Are: [more]
Sir John Templeton said that one of the keys to global investing is that -- given its purview -- it provides a "expanded opportunity set." This allows to discover when you can buy the world's cheapest telecom assets, and it also helps you decide if a company that you're looking at truly is cheap or not.
Take China Mobile (NYSE: CHL), for example. This is China's dominant cellphone company, and though it got a bit hosed on the country's 3G rollout, it expects to clean up when 4G goes live sometime over the next couple of years. It has the most market share, $26b in net cash, and some of the industry's best profit margins and returns on equity. Furthermore, if you look at its quick valuation ratios in a vaccum, it looks very, very cheap. The stock trades for just 5.0x EBITDA.
But take a look at this table:
Source: Motley Fool Global Gains research.
As you can see, China's among the world's more expensive telecom markets. That has to do with both its high expected growth rates and -- as of now -- somewhat limited competitive landscape.
Now look at this table:
Source: Motley Fool Global Gains research.
As you can see, China Mobile is pretty much the world's most expensive telecom as compared to the rest of the world, its own peers (who it admittedly dominates), or to other dominant emerging markets telecoms (a peer group I invented that includes America Movil (AMX), Telkom Indonesia (TLK), and others).
While that 5.0x EV/EBITDA ratio does still look enticingly low, remember that China Mobile has such amazing profit margins because it so dominates its domestic competition. As that market opens or -- more likely -- the Chinese government subsidizes healthier competition, we should see those profit margins erode. That means, without the stock going up, the EV/EBITDA multiple will expand. But a company with eroding profit margins probably would not longer command the world's highest multiple, so the stock price might actually meaningfully decline.
This isn't to say this scenario will come to play, but just that as you put China Mobile in context with its proper global peer group (dominant emerging market telecoms), you're paying a pretty penny to own a piece of China rather than a piece of Indonesia, Brazil, or some other. You may still decide to do that, but you should know that you are paying up to do so. And that's something only a truly global investing perspective can provide. [more]
Here's a quick summary of my night last night (I know I'm losing you already, but this has a point): [more]
That's us eating in Mongolia. Not sure if you can tell, but those are Chinggis Khaan (aka Genghis Khan) beer steins. I tried to buy one off of the restaurant, but they were having none of it. If we weren't on official business, I might have tried to pocket one. They were that cool. Anyway, here are your Friday Night Links...
FNL #1: The Fool's own Buck Hartzell shares some spectacular and comprehensive notes form Charlie Munger's Wesco Financial (WSC) annual meeting. Recommended required reading.
FNL #2: Yesterday's brand new issue of Global Gains. It's a good one. (Subscription required.)
FNL #3: A very well-written and well-researched WSJ cover story about the rise of megacities in India and the effect they're having on society. For those of you who liked The World is Flat, you have to wonder how "flat" the world actually is as it rapidly urbanizes into intermittent population centers. It actually seems as though the world is quite bumpy.
FNL #4: Paul Krugman makes sweeping statements about China starting with this telling line: "But that still leaves the problem of China, where I have been for most of the last week." Hey, Paul. If you're going to make sweeping generalizations about a country, try taking more than a week to arrive at your conclusions. But why should we ask a *NOBEL PRIZE WINNER* to actually be thoughtful/thorough when it comes to writing a *HIGHLY POLITICIZED COLUMN*. (In fact, I think the Chinese are trying to do quite a lot to help reduce their environmental footprint, though, yes, they could always do more.)
FNL #5: Jaydiohead. It's a portmanteau word that means Jay-Z meets Radiohead. You'll be tapping your foot all weekend long. (Hat tip to Gwyneth Paltrow, who, my wife discovered, writes a pretty mean newsletter.)
BONUS FNL #6: If you haven't, enter the Global Gains/CAPS Champion of the World Contest. You'll be glad you did.
Enjoy it. (Sorry the links didn't work earlier; apparently CAPS doesn't like Safari.) [more]
It's Thursday, which it means its time for the first stock idea from our Global Gains research team eligible to be rated in the CAPS Champion of the World Contest. (If you're not entered, you can do that here. Want to know the rules? They're here.)
Without further ado...
Idea #1: Short Naspers (NPSNY.PK)
Thesis: The stock is wildly overvalued since it’s mostly a no-growth traditional media company, but the market is valuing it as though it were a hyper-growth Internet company. The reason for this discrepancy is Naspers’ 35.5% ownership stake in Chinese instant messaging provider and Internet portal Tencent. Though Naspers’ Tencent stake is worth more than $6b today at current prices and Naspers’ market cap is just $8b, Hong Kong-listed Tencent simply cannot sustain a 16x sales multiple and 32x EBITDA multiple for long. When it drops, Naspers is going down with it since the true worth of Naspers is far less.
Company Description: What are you buying when South Africa’s Naspers ? I wouldn’t be surprised if you couldn’t tell me. The company is an amalgamation of full and partial ownership shares in print, television, and Internet media assets in a seemingly random allotment of countries, including South Africa, China, Poland, Brazil, and Russia. You can take a look at the company’s motley org chart on your own, but suffice it to say it’s all over the place. Though the management team seems adept and chairman Ton Vosloo has risen through the organization all the way up from lowly journalist (I kid), they seem inexperienced in the ways of new media -- the market niche where they’re making their big bets today. Further, there is enormous currency risk in all of these environments as well as few cost-saving operating synergies since there are language and platform differences. There’s just no logical way for the business to scale without further acquisitions.
Valuation: Naspers can be broken down into two segments: Old Media (TV, newspapers, and magazines) and New Media (Internet properties). The Old Media business has $2.2b in trailing sales and $541mm in trailing EBIT. Its growth is essentially flat. The New Media business has $362mm in trailing sales and -$60mm in trailing EBIT. It’s grown 20% yoy, though the losses have widened. What are the two parts worth? Not as much as the market seems to think, but to prove that, we have to dive deeper.
Based on a peer group analysis, Naspers’ Old Media assets should sell for about 2.0x sales and 7.0x EBITDA. That yields a fair value range of $3.8b to $4.4b.
A peer analysis of popular emerging markets Internet properties, on the other hand, indicates that they sell for an average of 4.5x sales and 18.0x EBIT. That would value Naspers’ New Media business between $1.6b and, well, something less than that since Naspers New Media business is posting losses. Further, the fact is that Tencent trades well above its peer group at 16x sales and 35x EBIT. That’s the second-highest valuation for this type of property in the world, second-only to Chinese search engine Baidu.com (BIDU), lending credence to my theory that Naspers’ stock price is being driven not by fundamentals or its underlying business, but by the momentum in the stock price of Hong Kong-listed Tencent.
To see that, just add up the high ends of our two valuation ranges. $4.4b plus $1.6b equals just $6.0b. Naspers today sells for more than $8b, so I suspect at least a 25% decline in the stock price from here. But it could go further. That’s because Naspers motley assortment of Internet properties are not all best-of-breed like Tencent and are subject to intense competitive pressures, and while I expect Tencent’s multiples to contract, I expect the multiple on Naspers’ portfolio to contract even more. Its traditional media properties also don’t have the brand cache of a New York Times (NYT) or a Disney (DIS) and thus probably don’t deserve similar multiples. Further, remember that Naspers is an enormous multiplatform bet on advertising, which may not be a bet you want to make in this depressed economic environment.
All of this is to say that I think fair value here is closer to $5b.
Now get started on the CAPS Champion of the World Contest by rating this idea. And if you want to see a few additional notes, including how you might trade on this if you were a hedge fun, get more notes on Naspers on our Global Gains discussion boards (membership required. Don’t have one? Click here to join our international investing research service where we put out many more ideas every month.) [more]
I warned you yesterday that the CAPS Champion of the World contest was coming, and tomorrow it will be here. I want you to enter, I want you to tell your friends to enter, and I want your friends to tell their friends to enter. If all that happens, someone will be declared Champion of the World, a few others will earn free Global Gains memberships, and the entire CAPS community will be smarter about global investing.
With that as prologue, let's get to the details...
To enter the contest: Every Thursday for the next year I’ll post an Official CAPS Champion of the World Contest Idea on this blog compliments of our Global Gains research team. These will be both longs and shorts and many of them may be stocks you've never even heard of.
To be eligible for the quarterly prize, you need to (i) rate at least one Official CAPS Champion of the World Contest Idea each quarter and (ii) at least one stock from the International Stocks tag that you find on your own each quarter as well. These ratings may be either outperform or underperform, and your rating of the Offical Contest Idea does not have to be the same as the outlook pitched by our team (we love dissent at Global Gains). Once rated, these picks cannot be ended. [more]
If you've been paying attention to this blog, then you may have gotten the subtle message that we've been doing pretty well with fertilizer companies at Global Gains. This, in part, is thanks to Chinese government policies to increase agricultural production and raise rural incomes.
As it turns out, I'm not the only investor who has sniffed out this trend. I was reading through some research this morning and lo and behold I happened upon Bank of America/Merrill Lynch's Rural Boom Index -- a portfolio of 20 emerging Asia stocks they they believe is poised to benefit from one theme: "Rising rural consumption in Asia ex Japan." Constituent members include China Mobile (CHL), China BlueChemical, China Yurun Food, and Bangkok Bank; country exposure centers on China, but also includes Pakistan, Malaysia, Singapore, Australia, Thailand, and South Korea.
Since its inception, this rural boom index has outperformed the MSCI Asia ex Japan index by 900 bps, which is pretty good given how strong emerging Asian markets, and particularly China, have been this year. This appears, in other words, to be one of the few things in recent memory Bank of America/Merrill Lynch has gotten right (I kid...sort of).
My own opinion is that this is a multiyear investment theme, and I like (and will probably adopt) the Rural Boom name they've given it. I continue like fertilizer companies at this stage because they're essentially the picks and shovels play here, but China Mobile is also an interesting play given the importance of cellphones in China (though that comes with more regulatory risk). Zhongpin (HOGS) -- one of China's major pork producers -- is also a name that gets pitched to me often, but the price has not dropped as much alongside the Swine Flu news as I would have liked (from an opportunistic standpoint), and given its store base, it's more of a play on urban China rather than rural China despite its seemingly very agricultural nature.
Anyway, food (literally) for thought. Will China's rural boom continue and will you be a part of it?
So following on last month's news that Japan would be doing an energy deal with Venezuela, we got word today that PetroChina (PTR) would be funding a joint venture with state-run PDVSA. Given that Chavez has crippled his country's energy infrastructure, he needs these deals to tap capital and continue funding his despotic regime.
It's too bad that the world is so desperate for energy that he can easily accomplish that, though it'd be interesting to see what would happen if he tells China he is nationalizing their stake in anything.
P.S. Please don't email me if you just think Chavez is a populist hero of the poor who just has a "bad rep." I'd just tell you you're an idiot. [more]
You may not have noticed, but it's been a banner week for small Chinese fertilizer companies. First, Inner Mongolia's Yongye Biotechnology (YGYB) filed its 10-Q for the first quarter last week and revealed 30% revenue growth, a gross margin increase to 52.5%, and the addition of 1,500 retail stores to its distribution network. It further announced that because it was seeing such strong demand for its fertilizer products that it had raised $9mm in a private placement to finance the working capital it needs to meet this demand. The company subsequently increased its 2009 guidance -- as they enter the booming summer months for fertilizer -- from $66mm in expected sales to $82mm to $84mm in expected sales. Wow. [more]
Report: Cuban called Martin a 'thug'
The NBA is reviewing a postgame confrontation between Mark Cuban and the mother of Denver Nuggets forward Kenyon Martin during which the Dallas Mavericks owner referred to Martin as a "thug" or a "punk," according to a report in The Denver Post. [more]
A busy day today so there wasn't much time to blog, but it didn't feel right sending you to your weekend with some Friday Night Links. But before we get to those, please note that we have earnings reports Monday morning from American Oriental Bioengineering (AOB) and China Fire & Security (Nasdaq: CFSG) -- two names that generally traffic in pretty exciting news. [more]
I've received a handful of complimentary notes on The Most Important Number in Investing -- my recent post about calculating discount rates for use on and in order to compare foreign stocks. The most interesting of these came from a money manager friend who pointed out that there's an element I left unnamed in the section called "Some sort of volatility premium appropriate for the equity you're looking at relating to the cost of that specific company's capital." [more]
Whenever I give presentations on international investing, I start with that picture, which, for me, captures everything you need to know about investing abroad.
You start with 1) a very cool place with no one else around (the background) then add 2) unpredictable regulations or a lack of regulations (the car without a license plate) which leads to either 3) frustration (that's Global Gains co-advisor Nathan Parmelee getting hit in the eye with some dust) or 4) sweet returns (me giving the double thumbs up). And no, we didn't stage that photo.
They key to separating frustration from sweet returns is quality analysis and valuation, which is punctuated by your choice of an appropriate discount rate when analyzing future cash flows.
And that's the most important number
Discount rates are critically important because they are one of the main drives in a DCF equation that will decide what you buy, when you buy it, how much you buy, and when you sell it. If you attack Chinese stocks with a 10% discount rate, everything is going to look cheap. And that’s not helpful in terms of separating opportunities from value traps.
I bring this up because we were arguing about this topic in a Global Gains idea meeting the other day when one of our analysts was applying a 9% discount rate to Accenture (ACN). And using that rate, ACN looked like a pretty good deal at $27.
But I balked. I use 12% to 17% on most of the stocks I look at, and given that you can get some quality corporate debt yielding 8% to 9% these days, why would you discount an equity at 9%? The response is that ACN is a high-quality company, but without getting too far into the company analysis, there are some risks to ACN that I don’t think a 9% discount rate properly accounts for.
But how does one choose an appropriate rate anyway?
My thoughts on the subject
There are lots of thoughts on discount rates, but at the end of the day it should essentially be something like this:
Appropriate Discount Rate=(The risk-free rate)+(expected return from an average equity investment)+(some sort of volatility premium appropriate for the equity you're looking at relating to the cost of that specific company’s capital)
Here’s how I break down those three rough variables in my own analysis.
The risk-free rate
Given that we expect a holding period of 5 to 10 years, start with what you'd get on the 5 or 10 year treasuries. Today, those numbers are 2% and 3.2% respectively.
But interest rates are historically low. Should that mean you should be reducing your discount rate? I don't think so because given all of the money that's being printed, I suspect interest rates are going to have to go up pretty soon, so you need to account for the opportunity cost of putting your money in equities with a 5 to 10 year time horizon when you might be able to get 5% treasuries at some point within that time frame.
So I basically start with the rolling 10-year average rate on 10-year treasuries as my risk-free rate. Long story short, it's about 4.5%.
The expected return from an average equity investment
We can argue about what to call this (i.e., equity risk premium) and how you should measure it (i.e., market's historical return), but my current thinking on the subject is that if a big stock is at fair value (and let's assume that indexes tend to be pretty efficiently valued by their nature), then equity returns are going to track GDP growth in that country.
This proxy (expected rolling GDP growth) has the added benefit of somewhat accounting for inflation. Again, given that this is a crisis year and you presumably have a longer holding period, then you want to take some sort of rolling average of the past, the present, and the future to ballpark the figure. Of course, every country will have a different GDP growth number and that means you discount rates will start differing for each country. This is appropriate in my opinion. China is not the US and neither is Russia.
For China, you could argue for anywhere between 5% and 10%; the US probably 2% to 4%; India 5% to 8%; Brazil 4% to 6%; and so on. What you ultimately decide on is up to you and is a product of your own analysis. For China these days, I'm generally plugging 8.0% here.
Some sort of volatility premium appropriate for the equity you're looking at relating to the cost of that specific company's capital
Here's where you'll customize your discount rate even more depending on the company you're looking at, and as you move from country to country, you can look at the rates company's in that country are paying on their debt to get a good idea of the appropriate cost of capital. Note that you don't necessarily just add the cost of capital on here because you've already accounted for some of that in your risk-free rate and equity premium. The point is you just want to make sure that you've accounted for country risk and if company's in Turkey have to pay more in interest than companies in China due to politica risks, then you want to make sure you're not discounting Chinese stocks and Turkist stocks at the same rate. If Chinese small caps also appear to be paying higher rates than Chinese large caps, then account for that as well.
This is also where you can build in some kind of discount for currency assumptions. My working practice today is to add 1% if I suspect the currency will weaken (euro, African currencies) over the length of my holding period and to subtract 1% if I think the currency will strengthen (RMB) over the length of my holding period.
So how does this work in practice. Here are two examples of how I arrived at discount rates for two different companies. One is ABB (ABB), a large multinational industrial with a strong balance sheet; the other is China Fire & Security (CFSG), a small Chinese industrial with a strong balance sheet.
ABB's discount rate=Risk-free rate+blend of developed and emerging markets equity premium+currency risk given reliance on euro=4.5%+5.5%+1.0%=11.0%. (Note that the rates ABB is getting on its debt are less than the global average, so the banks seem to think this is a relatively good credit profile.)
CFSG's discount rate=Risk-free rate+China equity premium-currency benefit+small-cap premium=4.5%+8.0%-1.0%+2.5%=14.0% (Note that while CFSG has not debt, Chinese banks are charging similarly-sized companies in China about 10% to lend them money, which is high.)
This is no exact science, but it makes sense to me to compare ABB and CFSG using different discount rates and this is my working system for how I get after it. Thoughts and feedback welcome; please add your own thoughts on discount rates in the comments. [more]
Those of you who frequent CAPS and who pay attention to relatively unimportant things probably already know that I don’t like the $100 million market cap minimum that’s required for a stock to start collecting CAPS ratings. That’s primarily because it denies me the opportunity to collect points in the market niche that I spend the most time studying, but it’s also because it’s among the micro caps that I believe CAPS can offer the most incremental insight. After all, no one else is covering these stocks, so if one of you come up with something/anything (!), then we’re all better off.
Alas, no dice. But that’s why I wanted to take this opportunity to highlight the fact that China Green Agriculture (CGA) has crossed the $100 million market cap threshold and is ready to receive your ratings. This, of course, is 160% worth of gains after I recommended the stock in Motley Fool Global Gains, but better late than never.
The good news is that China Green is still worth of your green thumbs. I put fair value somewhere between $8 and $12 and with the company’s new manufacturing facility about to bring 40,000 tons of annual capacity online (the company’s current capacity is just 10,000 tons), we do have a near-term earnings catalyst. (Incidentally, our Global Gains team hopes to go back and see the new facility in operation when we return to China in June/July.)
But back to that market cap minimum
Our experience with CGA, however, highlights why CAPS could/should be a great source of information on micro cap stocks. After all, when we visited China Green in Xian last summer, we met with the CEO, Mr. Li, toured the company’s greenhouse research facility, and got a sense of the corporate culture (see The Snake posing at the company’s orchid-soaked HQ above). We came away impressed.
You can figure out which one Mr. Li is. The man knows his fertilizer.
That boots on the ground intelligence allowed us to watch as the company’s PIPE shares got registered with the SEC and then -- due to some distressed hedge fund selling -- dropped from the $3.25 PIPE offering price all the way down to $2.20. The stock at that point was selling for a little more than 3x my FY 2009 (ends on June 30) earnings estimate. If the multiple expanded to 10x, we were looking at a triple.
China Green’s research center. Each greenhouse can mimic one of China’s climate zones.
Thanks to a listing on the AMEX and renewed institutional interest in the stock, that multiple has expanded, and we’ve almost got that triple on our Global Gains scorecard. It happened faster than anticipated, but it turns out the market is a pretty efficient place. But again, the reason we got a deal was because we were willing to go out and gain an informational advantage over the stock market.
Can CAPS give you that advantage?
But when it comes to the next China Green Agriculture, due to the CAPS market cap minimum, you won’t find it here. And indeed, there are a number of Chinese micro caps we continue to study today and hope to visit on our upcoming Global Gains research trip.
So I hold out hope that the system will change, but in the meantime, go and rate CGA. At a $100mm market cap, it’s still a pretty small company with a big market opportunity ahead of it. There’s also already a great pitch on its CAPS page courtesy of CREWatcher that -- though I quibble with the use of a 10.25% discount rate (too low) on the valuation -- accurately indentifies the main business drivers going forward.
And I’ll plan the seed that you should sign up to get our dispatches from our next research trip because we are on the lookout for the next China Green-type situation at Global Gains. More on that later.
The classic channel check. That was a good cucumber. [more]
...that, you know if you're a regular reader of this blog, is extraordinarily difficult to buy. Can you handle it?
That's Adinaldo, the man, the myth, the legend who drove us around Sao Paulo and made sure we were safe. He was great.
Now, without getting too weird on you, you can see that Adinaldo has fairly good teeth and no braces. What I noticed in-country, however, was that that's not always the case. You have high-profile soccer stars such as Ronaldo and Ronaldhino who while possessing world-class futbol skills, do not have world-class teeth. [more]
There was a flattering portrait of Chilean finance minister Andres Velasco on Bloomberg a little while back that's worth your time. Basically, Mr. Velasco made the difficult choice of restraining spending when copper prices were booming, prompting riots among various Chilean constituencies who wanted handouts, and instead built a healthy surplus of cash. This, of course, has left Chile in a pretty enviable financial position now that copper prices have collapsed and folks are feeling the pain of a down economy. The government can continue to spend on social programs without raising taxes.
The very applicable quote is this one from Larry Summers: "In this world, there are some people who are smart. There are some that are practical," said Summers. "Andres Velasco is both." Ours, after all, is a financial crisis that was created by smart, but totally impractical people. Open question to readers: Why is the combinantion of intelligence and practicality so rare? (It's something worth noodling, particularly given that this past weekend was the Berkshire Hathaway annual meeting -- a company that has been built to the sky thanks to Buffett's rare combination of intelligence and practicality.) That's also the challenge to you when it comes to your own investing success: Can you be both smart and practical?
There's also an entertaining section near the bottom "Andean Counterpoint," which contrasts Chile's financial successes with Argentina's abject failures. Of course, we should all be so lucky to have something as incompetent as Argentina as our logical comp. Feel free to start referring to your most incompetent coworker as Argentina and then comparing yourself to him/her at your annual reviews. Or if you get in trouble with your significant other, use the line, "Hey, Argentina would have mucked this up way worse." :-)
By the way, Chile is a beautiful country. Make it down there if you ever have the chance...
Pour yourself some cobra and scorpion whiskey and enjoy the weekend with this list of global-investing oriented (and some not) worthy reads:
FNL #1: As it turns out, China's stiumulus is having some positive effects on American companies because it's big and it's being acted upon quite quickly. So put your protectionist priorities aside and embrace the global economy. (From the WSJ.)
FNL #2: One of the knocks on China is that its statistics are manipulated and totally unreliable. That may not be the case for long if the government follows through on their plan to criminalize -- quite harshly --official statistics manipulation. (From Xinhua.)
FNL #3: I've gotten some questions about my last post where I declared with some rapidity that Turkey wasn't all that risky. It was a a bit of a flip statement, and so to even out the coverage, I bring you the Turkish military's denial that they were planning to topple the government. (From the NY Times.)
FNL #4: Many of you may have already read Jeffrey Goldberg's missive in The Atlantic about why he fired his broker (I've seen it linked to by more than a few people on Fool.com and elsewhere). But if you haven't, it's worth reading...particularly if you're a longtime Fool. I mean, why did it take Mr. Goldberg -- a bright guy -- so long to figure out he was getting bilked by Merrill Lynch. Finally, as a coda to the story, I'll reveal that I emailed Mr. Goldberg and told him that if he really wanted to take his financial future into his own hands, he should start by coming to Fool.com. I haven't received a reply, and I don't think his positions in gold and canned goods are really going to see him through the next decade. If you're reading, call me, Jeff.
FNL #5: Finally, because I got some questions about the seemingly random Mark McGrath photo I included on another post yesterday, I thought I'd include the link to Camp Freddy, the Mark McGrath-fronted hard rock all-star cover band that played the Roth Conference this year. It really was a good show, and if you like the classic rock, they're worth checking out.
Have a rock 'n' roll weekend everybody...
I'm getting ready to teach a seminar internally here at the Fool on global investing. The first session of that seminar is slated to be a broad overview of strategy and the reading in chapter 2 and pp.83-85 and pp.145-146 of Global Investing: The Templeton Way (in case you want to follow along).
The gist of these excerpts is that the reason global investing works is because, in Templeton's view, you're looking across the entire Earth to determine where you'll get the most value for your money. You can read the book for more color, but here's how that idea works in practice.
A case study
Let's say, for example, you're interested in buying shares of a major telecom company. If you're a US-only investor and you look at comps, you'll find that average US telecom services firm is selling for a 5.5x EV/EBITDA ratio. That makes Sprint, Embarq, and US Cellular all trading for 3.5x to 4x EBITDA look pretty cheap.
But now let's hit the road and widen the scope.
As it turns out, the average major telecom company around the world is trading for 5.2x EBITDA, and the real bargains are in Argentina, Brazil, Japan, and eastern Europe. Take a look:
Company Country EV/EBITDA Ratio
Telecom Argentina (TEO) Argentina 2.2
Sistema Russia 2.3
Brasil Telecom (BTM) Brazil 2.4
Telefonica Argentina (TAR) Argentina 2.8
KDDI (KDDIF.PK) Japan 3.1
Mobile Telesystems (MBT) Russia 3.1
Turkcell (TKC) Turkey 3.2
Nippon Telegraph (NTT) Japan 3.3
NTT DoCoMo (DCM) Japan 3.3
Magyar Telekom (MTA) Hungary 3.3
Does this mean go and buy Argentina or Russia? No, not necessarily. Both of these countries have very meaningful stability/nationalization risks, which means telecom may not be cheap at even a little more than 2x earnings. Though I'll still buy Argentine steak whenever I have the chance:
Those risks, however, are not issues in Turkey or Japan, which is what makes Turkcell and NTT DoCoMo look so appealing to the global investor here. (Turkcell, in full disclosure, is an existing Global Gains recommendation.)
This is why Templeton supplements his advice to look for value globally with this guidance: "The numbers don't exist in a vacuum. The global investor must see the world not only in terms of P/E ratios and dividends, but as the teeming, turbulent planet-sized village that it is."
What that means
This is why Turkcell looks like a such a nice opportunity. Not only is it cheaper than its US and global peers, but it's a near-monopoly operator, has the best network in Turkey, has already invested in nationwide coverage, and has actually increased its subscriber-base with the introduction of number portability (which was supposed to make it easier for upstarts to compete). The reason it's cheap is that the market fears instability in the region, domestic political craziness, and that Turkey will prove to be more sensitive to the economic downturn that other countries. There are also some concerns that the Turkish currency (the lira) will weaken dramatically against the dollar.
These are all risks/headwinds, but they're not quite the same set of risks/headwinds that Argentina or Russia are facing. (Brazil and Japan are even less risky macroeconomically speaking, but those telecom spaces are much more competitive.)
If you want to be a truly successful value investor, it pays to have global perspective. And that's why we think we have an advantage over much of the market when it comes to Global Gains.
Though you may end up sticking with the US even when its valuations aren't lowest, but that will be a risk-adjusted decision...not just one you made because you weren't paying attention.
Finally, this week's Friday Night Links are coming later this afternoon. It should be a good edition.