7/12/2012 7:27 PM ET|
Place your bets on sin and bling
As incomes in the developing world grow, so will appetites for gambling, high-end booze and luxury goods. Here are some stocks worth a look for this long-term trend.
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.
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.
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Loading up on sin and bling
Some sin and bling stocks for the long run?
It's hard to argue with Diageo (DEO). At a July 11 close of $103.36, the stock trades near its 52-week high. But the forward price-to-earnings ratio of 17.3 on fiscal 2012 earnings isn't too outrageous, in terms of what you're paying for future growth. This puts the stock's price-earnings to growth rate (PEG) ratio at 1.48. The company owns the Johnnie Walker brand and has recently announced that it would invest $1.5 billion to expand Scotch production over the next five years.
Anheuser-Busch InBev's (BUD) purchase of Mexico's Grupo Modelo for $20 billion, following so closely on SABMiller's (SBMRY) purchase of Australia's Foster's for $12 billion, illustrates the race among the world's big brewers to snap up brands that can add a head of growth to slow sales in mature markets. Which beer companies might be in play? SABMiller has acquired a 24% stake in Turkey's Anadolu Efes (which trades as AEFES.TI in Istanbul). The Turkish brewer exports about 75% of its production, with Russia (where it holds 20% market share) making up its single biggest export market. SABMiller also needs to find a way to challenge AB InBev's dominance in Brazil, the world's third-largest beer market. The best play there would be an acquisition of privately owned Cervejaria Petrópolis, which holds about 7% of the Brazilian market. In Africa, Kenya's Tusker, brewed by East African Breweries (which trades as EABL.KN in Nairobi) would be a way to gain share in one of the continent's fastest-growing economies. Diageo is the company's largest shareholder.
In the bling sector, the fastest-growing market is branded jewelry, which at the moment represents just 19% of the total fine-jewelry market. LVMH Louis Vuitton Moët Hennessy (LVMUY) acquired Bulgari for $6 billion in 2011, doubling its watch and jewelry sales and giving a boost to the company's drive to enter the branded watch and jewelry market. The company's Louis Vuitton Watches and Jewelry division has plans for standalone stores in New York, London and Hong Kong.
The most interesting play in this part of the bling sector, though, in my opinion, is Compagnie Financière Richemont (CFRUY). The owner of the Cartier and Piaget brands already gets 42% of sales from the Asia-Pacific region and has plans to grow its retail business in China to 250 from 160 stores.
Buying opportunity ahead?
A word of caution on buying shares of luxury-brand companies right now. Hong Kong has just announced that luxury sales grew by only 8% in May. That's the lowest growth rate since September 2009. It looks as if the slowdown in China's economy is taking a bite out of the market for luxury goods, too. I'd watch to see if I could get a piece of the smart long-term strategy of these companies for a lower price come September or so.
That would also be my approach to the Macau gambling market right now. I like the stocks of the companies with big positions in the explosive growth of gambling in Asia -- and especially Las Vegas Sands (LVS) or its Macau unit, Sands China (1928.HK in Hong King), and MGM Resorts International (MGM). But a slowdown in growth in Macau is putting pressure on these stocks. And I expect that pressure to increase after Sands China asked earlier this week for an extension on its permit to build a new casino resort on Macau's Cotai strip.
Let that play out for a while, and you might find a bargain or two by fall.
After all, even if you like a company's long-term strategy, there's no reason not to look to buy in after a short-term drop.
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At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages,Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Anadolu Efes, LVMH Louis Vuitton Moët Hennessy, MGM Resorts International and Sands China as of the end of March. Find a full list of the stocks in the fund as of the end of March here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
Be nice. The heads of MSN have been busy on the phone trying to reach Russell Wasendorf Sr. regarding their accounts, but they keep getting a busy signal.
I'll say one thing for Jim Jubak. He has skin in the game.
Whatever happened to the emoticons?
Jim Jubak says:
"China, now the world's biggest beer market, accounted for 43% of the world's volume growth in beer." No American owned large company makes beer. American owned large companies used to make beer. China lends us more money than any other country. "Jubak says: If I'm right, we're headed for more years of a recovery that at times is going to be so painfully slow that it won't feel much different from a recession." I think he is right. All the FED can think about is trying to stimulate recovery while keeping interest rates so low no saver can make any money. The policy is designed to create jobs but is not working very well. The big companies are just holding on to their money. If you did the right thing and saved for you future with CDs and money market accounts the FED is just going to let you to live without interest income probably forever.
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