Remember how, once upon a time, long-term investors used to ridicule company managers who seemed to have their eyes fixed no further into the future than the end of the quarter?
These days, the roles seem curiously reversed.
Oh, there are still CEOs who think they've done a great job if they beat Wall Street estimates by 3 cents a share at the end of the quarter. But I see an increasing number of smart, far-sighted CEOs who see the current market turmoil and economic confusion as a chance to make acquisitions and market-building investments that will pay off over the next decade.
In contrast, I see many individual investors who are afraid to invest for the long term because the past decade has been volatile and punishing -- and the future looks uncertain. They worry about having to take a short-term loss -- perhaps a big short-term loss.
I won't tell you to ignore the possibility of short-term losses. This stock market is so volatile that having a strategy to avoid such losses, or at least cope with them, is essential.
But I would like to bring to your attention two related sectors where I think far-sighted companies are making the kind of long-term investments that individual investors should ride along with. I think a long-term perspective will pay off in both of these sectors.
Which two? The sectors I call sin and bling. The former is composed of alcohol and gambling businesses, and the latter is made up of companies in the luxury goods segment -- especially those with a big stake in the jewelry business.
Jim Jubak
The trend to sin
The logic in these two sectors is very simple and very similar:
1. Maturing markets in developed economies are, well, mature. Sales growth is very slow and likely to stay disappointingly slow, even after the effects of the Great Recession pass (whenever that might be). For example, in Japan, Kirin and Asahi Group are forecasting 2012 beer sales growth of 2% and 0.5%, respectively. In the United States, beer sales volume fell by 1.7% in 2011. Gambling revenue in Nevada grew by 2.8% in 2011. Jewelry sales in the United States grew at a 5.3% annual rate in the first quarter but fell by 3.7% year-over-year in May.
2. The growth is all in developing economies. China, now the world's biggest beer market, accounted for 43% of the world's volume growth in beer. Wine imports to China are growing at a 50% annual rate. Jewelry sales are forecast to grow at a rate in the high teens in 2012 after growing by 40% in 2011. In the first six months of 2012, gambling revenue in Macau grew by 20% from the same period in 2011.
3. The biggest growth comes in aspirational sin and bling. Increased consumption of everything from beer to fine watches is a reflection of the growth of the middle class in developing economies. Brazil's lower-middle class -- families making between $850 and $3,667 a month -- grew by 60% from 2003 to 2011 and is forecast to grow by an additional 12% by 2014. Brazil's middle and upper-middle classes -- families making more than $3,667 per month -- are forecast to double from 2003 to 29 million by 2014. But the biggest growth in sin and bling products is where the story isn't just being able to afford more, but being able to afford better. And here, the highest sales growth goes to sin and bling that signal a consumer has arrived at a higher status. Sales of premium spirits -- such as single malt Scotch whisky -- are forecast to grow at an average annual rate of 13% for the next 15 years, according to Goldman Sachs. And that's with emerging markets already accounting for 40% of premium spirit sales by volume.
4. The big profits are in branded sin and bling in situations where it's hard or expensive to create new brands. Better to buy or expand existing, well-known brands. Scotch is a great example. By definition, Scotch can be made only in Scotland and must sit in oak casks for at least three years to mature. Global sales of Scotch are up 50% in the past five years, and, as you'd expect with demand growing and supply limited, Scotch prices have moved up nicely. By volume, Scotch makes up just 4% of the 27 billion liters of spirits sold annually, but by dollar value of sales, Scotch makes up 12% of the global spirits market.
Stock mentioned on the next page include LVMH Louis Vuitton Moët Hennessy (LVMUY), Diageo (DEO), Anheuser-Busch InBev (BUD), SABMiller (SBMRY) and Las Vegas Sands (LVS).
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