The United States faces myriad economic challenges, yet somehow,
the U.S. stockmarket has managed to post solid gains during the
past few years, as I noted roughly
a week ago
The S&P 500 has been one of the top gainers in the world
during the past two years, outpacing gains seen in Europe -- and
outright losses elsewhere. In that column, I was surprised to
find that the BRIC countries (Brazil, Russia, India and China) have
dropped in value -- some by a considerablemargin -- during this
same time frame.
Despite that underperformance, I'm still a long-termbull in
places like China and Brazil -- for one very simple reason: These
two countries have built durable middle classes that are just now
becoming free-spending consumers. The shift to a
consumer-driveneconomy is a powerful investing theme. As consumers
spend, a range of businesses sprout up to serve them, hiring
employees who eventually move up into the middle class, furthering
the consumer-spending dynamic.
You only need to see what has happened here in the United States
to know what will likely happen in these countries. My grandparents
came to this country with zero understanding of the English
language. Yet they scratched and saved to send my parents to
college. In my generation, my sister and I were the first to get a
master's degree. Looking back to 70 years ago, my grandparents
could never have conceived of the quality of life that their grand
kids (and great grand kids) now enjoy.
This same dynamic is likely to play out in China and Brazil.
It's been a bumpy ride, but they are on the road to prosperity.
That's why I keep focusing on companies that serve consumers in
those dynamic countries. In the past few months, I have recommended
several ways to invest in these consumer trends and after
digesting second-quarter results, I still very much like what I
Here they are…
1. Seven Days Holdings (NYSE:
I profiled this Chinese lodging firm
a few weeks ago
. The company reported second-quarter results that are likely to be
the pattern for quarters to come as well. Sales of about $99
million were just shy of the $100 million forecast. YetEBITDA of
$26 million was slightly ahead of forecasts. That's because this
company is slowly switching to a franchise model, which crimps
sales but boostsprofit margins. In the second quarter, that
transition happened a bit more quickly than analysts had
Guidance for the third quarter brings more of the same.
Projected sales of $106 million will likely be slightly below
consensus forecasts, but better-than-expected profit margin targets
leave analysts' profit forecasts intact. Shares of this stock
are up roughly 15% since I recommended them on July 25, but I still
think you may be looking at a potential double as more investors
come to appreciate thecash flow potential n thisbusiness model
2. Melco Crown (Nasdaq:
This is also a "China play," though it is actually focused
offshore, in Macau, which is shaping up to be the gambling Mecca of
Asia. I've written about this stock on several occasions, most
in late June
Back then, I noted a clear loomingcatalyst in the form of a
possible imminent approval from the government for a major new
complex known as Macau Studio city. TheWall Street Journal stirred
up a bit of controversy in late July when it noted that Melco had
indeed gotten a green light, but omitted any reference to a casino
(which would be a crucial anchor to line up funding). The company
has subsequently been much more direct in noting that yes, a major
casino is a big part of the plan. In reviewing second-quarter
results, analysts at Citigroup noted that the company has secured
the necessary work permits and the facility should open in 2015.
Their $21price target represents a double from current levels.
Melco is also spreading it bets beyond the Macau market. The
company has signed a preliminary agreement to develop a casino in
the Philippines to tap that nation's desire to establish a major
casino strip in Manila. (There are currently four casinos under
development in the Manila region, though none of them are perceived
to be world-class as the facilities in Macau are).
This is obviously a long-term driver, but it looks like
management wants to gain a foothold now in what could be a
promising market down the road. Filipinos tend to be active
gamblers, so the government not only wants to keep these
spenders at home but attract foreign gamblers as well.
Brazil's short-term pain and long-term gain
I also keep an eye on Brazil. That country is suffering from a
growth hangover, so a number of stocks in that country are far from
their 52-week highs. My two favorite stocks are
Arcos Dorados (Nasdaq:
, a Latin American franchisee for
a Brazilian home builder.
3. Arcos Dorados
I looked at Arcos Dorados in May
, the company has gone on to report another so-so quarter on the
heels of slowing consumer spending. Yet as I noted then, shares
appeared oversold in the context of near-term weakness, and have
indeed moved up a bit, despite so-so second-quarter results. For
long-term focused investors, this is still a very appealing play as
Latin American economies regain their footing.
Home builder Gafisa was initially looking like a lousy pick. Shares
had already fallen sharply by the time I profiled the company
in early April
, but fears of a cash crunch sent this stock even lower, to just $2
by early June.
Well, just-announced second-quarter results show those fears to
be overblown, and shares are already back up above $3. The
company had been expected to lose roughly $10 million in the June
quarter but instead reported a small profit. It's too soon to
signal the "all clear" for this stock as the Brazilian economy
remains weak. But as that country works off the excesses of its
housing market in 2012, a case can be made for a much better 2013
as economists point to several growth drivers for that economy.
This is a stock that has fallen roughly 80% since late 2010, and
should be on your research list now, before operations tangibly
Risks to Consider:
As noted earlier,emerging markets are still vulnerable to
further drops if investors get spooked about the still-unresolved
crisis in Greece.
Action to Take -->
It's impossible tocall the bottom in stocks like these, but
each company is aiming to ride piggyback on powerful long-term
demographic trends. They don't deserve a big place in your
portfolio, due to their speculative nature, but provide robust
potential upside if you've got a long-term time horizon.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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