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Turkcell: Emerging Market Growth at Crisis European Prices

Europe may be mired in crisis and global growth may be slowing, but it is business as usual at Turkish mobile giant Turkcell Iletisim Hizmetleri ($TKC).

Turkcell released second quarter results late last week that beat expectations. Group revenues rose by 13 percent and Turkish revenues were up 9 percent—not bad at all given that the country shares borders with a Europe mired in crisis and a Syria in the midst of a civil war that threatens to destabilize the region. Net income was also up 13 percent.

These results came in ahead of expectations and sent shares sharply higher. After bottoming out in late May, Turkcell shares are up by fully a third. Not a bad two-month run, all things considered.

Turkcell (NYSE: TKC)

Looking under the hood, the there is a lot to like. Subscribers of Turkcell Turkey rose 192 thousand to 34.7 million during the quarter, despite intense competition from international telecom juggernaut Vodafone (VOD), and the mix of prepaid and postpaid subscribers continues to shift in favor of more profitable and consistent post-paid contracts. Average revenues per user continue to climb due to increased data usage; they were up 5.6 percent for the quarter.

Smartphone usage—with the lucrative data plans it entails—also continues to rise though the smartphone penetration rate remains low at 15 percent.

This is about as good of a story as you can find in an emerging market stock of Turkcell’s quality. As a country, Turkey’s cell phone penetration rate is only 88 percent; in most advanced countries, the number is far in excess of 100 percent. (Yes, there are more mobile devices than people. Are you surprised? I didn’t think so.) This means that Turkcell can growth through three distinct avenues:

  1. Reaching new customers who previously did not own a cell phone
  2. Converting pre-paid customers to more profitable post-paid contract customers
  3. Upgrading regular feature-phone customers to smart-phone customers

Bottom line, Turkcell is fine way to invest in the long-term growth of Turkish living standards and the rise of the Turkish middle class.

Turkcell is also an interesting contrarian play. As I wrote last month (see “Bring in the Tanks”), the struggle for control of Turkcell’s board has made the stock something of a pariah. Turkcell hasn’t paid a dividend in two years because the two rival shareholder factions can’t sit in a room together for long enough to agree to pay it.

The boardroom circus keeps a lid on share prices, but I’m ok with that. It will get fixed, and soon. The Turkish government is losing patience, and the fiasco has become something of a national embarrassment. In the meantime, we’re able to accumulate shares of one of the finest emerging market stocks on the market at very reasonable prices. Turkcell sells for just 11 times expected 2013 earnings.

Turkcell was my choice in InvestorPlace’s 10 Stocks for 2012 contest, and I reiterate my “buy” recommendation today.

Disclosures: Sizemore Capital is long TKC.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Turkcell: If I could be a Turkish general for a day…

Not to play on stereotypes, but if Turkcell ($TKC) were a government and not a private company, a cabal of stone-faced Turkish generals would have surrounded its headquarters with tanks months ago and forcibly taken over its board of directors.

And if they had, you could bet that the share price would have enjoyed a nice rally. The battle for control of Turkcell’s board—which has prevented the company from paying a dividend in over two years—has exhausted investor patience to the point that a coup d’état (or perhaps a coup de compagnie?) would seem appealing.

Investors may get their way, though alas, there will be no tanks. After a special shareholder meeting scheduled for June 29 failed to materialize, Turkish Transport Minister Binali Yildirim told Reuters that the government may soon intervene in the public interest.

The Turkish state certainly has the grounds to intervene. The Capital Markets Board, the Turkish markets regulator, warned Turkcell earlier in June that it had failed to comply with new rules requiring at least three independent board members. And why is Turkcell out of compliance? Because the two major shareholder factions can’t agree on who qualifies as an “independent” board member, and no one wants to give a vote to the “other guys.” Sigh….

For those new to this little bit of boardroom drama, two major shareholder groups are vying for control of the company, but neither currently has enough votes on the board of directors to prevail. The court cases that have ensued have spanned the globe, even ending up in locales as remote as the British Virgin Islands and Britain’s Privy Council.

The board drama has been a major distraction for the company and has impaired its long-term strategic planning, but it hasn’t slowed down the company’s operating results, which continue to be strong. Turkcell is widely praised for its Western-educated executive team and consistently ranks high among European peers for customer service quality. (Yes, you read that right. I said “European” and not “emerging market.” Turkcell punches above its weight.)

The proof is in the pudding. In the first quarter of 2012, Turkcell enjoyed year-over-year revenue growth of 12.3% and profit growth of 56.0% (see investor presentation).

Even better, the sales mix is shifting in Turkcell’s favor. The company enjoyed 35% year-over-year growth in smartphone sales, with the lucrative data plans that this implies, and the subscriber mix (which, like many emerging market providers, is weighted heavily towards pre-paid customers) continues its shift to post-paid contract customers.

Though the boardroom fiasco is no doubt keeping a lid on Turkcell’s share price, its moves have not been out of line with the broader Turkish market (see chart). Turkcell and the iShares MSCI Turkey ETF ($TUR) have moved in virtual lockstep since hitting a bottom in early June.

Turkcell remains one of my favorite plays on the rise of the emerging market consumer, and I consider the stock to be very attractively priced. Shares trade for just 10 times forward earnings, and the company has very little debt.

The board impasse will be broken—eventually. And when it is, investors can expect a modest dividend windfall.

Until then, they will have to be content with owning an emerging-market gem with great growth prospects trading at a modest earnings multiple. Come to think of it, that doesn’t sound so bad.

Disclosures: TKC is held in Sizemore Capital accounts.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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China is Slowing: How to Invest

It’s a peculiar sort of problem when your economy grows at 8.1% in the first quarter and yet talk abounds of a “hard landing.”  American and Europeans haven’t seen that kind of growth in decades—and they could desperately use it today.  Yet such is life is China; after years of growing at a blistering pace, growth of “only” 8.1% represents a slowdown.

The 8% mark is considered by many to be the minimum growth rate that China needs to maintain high employment and to keep living standards rising.  And by the government’s own calculations, Chinese growth will likely slip below that level for the full year 2012.  Citing weakness in China’s European export markets and lower construction spending, the Chinese government lowered their full-year target to 7.5%.

The Chinese government doesn’t take its own GDP numbers seriously (they know the numbers are baked), and neither should we. But other statistics are even more sobering.

Consider the tepid growth in imports.  China’s imports grew by a pitiful 0.3% in April, compared to an average growth rate of 25% throughout 2011.  It is no shock that this has coincided with a general sell-off in commodities prices.  More on that shortly.

Let’s take a look at what China’s leaders themselves find important.  Li Keqiang, China’s heir apparent as premier, let on that he watches three indicators to gauge the direction of the Chinese economy (see his comments): electricity consumption, rail cargo, and bank lending.  None tells a particularly optimistic story.

Electricity consumption grew by just 0.7% last month vs. 7.2% the month before.  Growth in rail cargo volume has been cut in half.  And bank lending?  With the government actively trying to deflate a housing and construction bubble, it has slowed dramatically.

Now that I’ve bombarded you with scare statistics, how should we react as investors?

First, step back and try to keep perspective.  Yes, there is a steady stream of bad news coming out of China that signals slow growth ahead.   But “slow growth” is clearly a relative term when your economy is growing at a 7-8% clip.

China’s leadership are not fools, and they realize that the model that has served them so well in recent decades—manufacturing cheaply and exporting to the West—is broken.  It’s hard to find success as an export-driven economy when the buyers of your products are grappling with a crippling debt crisis.

Realizing this, China’s leadership indicated earlier this year that “the key to solving the problems of imbalanced, uncoordinated, unsustainable development [in China] is to accelerate the transformation of the pattern of economic development. This is both a long-term task and our most pressing task at present.”

In other words, it is the stated objective of the Chinese government to deemphasize investment and instead boost domestic consumption.

Investors wanting to profit from the reorientation of China can follow two trends:

  1. Avoid commodities and the firms that produce them or even look for opportunities to go short.  China has been the overwhelming force behind the commodities bull market of the past decade, and without aggressive Chinese buying there is no bull market.
  2. Buy the companies that stand to profit from a Chinese consumer shopping spree.  My preferred “fishing pond” is the luxury goods sector, defined here as everything from flashy handbags to performance automobiles.

Consider what the Economist has to say about China’s demand for luxury:

More than half of this year’s growth in luxury goods will come from China, where sales are set to soar by 24% in 2012. The country is already the largest market for jewellery after America, and for gold after India, and is gaining fast on both leaders. Prada and Gucci owe a third of their global sales to the rich in China. CTF saw same-store sales on the mainland shoot up by 45% from April to September last year.  See “Riding the Gilded Tiger

According to the Financial Times, emerging markets account for 40% of all luxury sales (up from 27% as recently as 2007), and this does not include wealthy emerging market tourists who buy in the shops of New York or London.  Again, according to the Financial Times, as much as half of the luxury sales in Europe are to emerging-market tourists, many of whom hail from China.

This week Richemont, owner of the Cartier brand (among many others) and the world’s second largest luxury retailer by sales, announced that sales and profits rose 29% and 43%, respectively, largely on strong demand from China.  Perhaps surprisingly, demand in Europe was robust, with sales up 20%.  Crisis or not, it would appear that well-heeled consumers are spending freely on life’s frivolities.

The crisis in Europe has make the luxury goods sector all the more interesting.  Most of the biggest names in high-end luxury goods are European firms, and with the Eurozone mired in crisis we’re getting buying opportunities we might not see again for a long time.

One of my favorites is French luxury conglomerate LVMH ($LVMUY), the maker of Louis Vuitton handbags, Dom Perignon champagne, and many other delightful goodies.  Mercedes-Benz manufacturer Daimler AG ($DDAIF) is also an excellent play on Chinese growth.  China is the biggest market for the Mercedes S-class and the biggest engine of the company’s growth.

Investors wanting to stay closer to home could consider Beam, Inc. ($BEAM), the distiller or Jim Beam Maker’s Mark bourbon whiskies and Skinnygirl cocktails among others.    Beam is a smaller rival to international spirits juggernaut Diageo ($DEO), and its brands lack some of Diageo’s cachet. Still, Beam is attractive as a recent spinoff from Fortune Brands, and it stands to grow at a significantly faster pace in the years ahead.  I consider both excellent holdings for the next 12-24 months.

Disclosures: LVMUY, DDAIF, DEO and BEAM are held by Sizemore Capital clients.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The 10 Best Stocks for 2012

Charles Sizemore, the winner of InvestorPlace’s “10 Stocks for 2011” contest, offers his favorite stock for 2012.  Read about Charles’ pick and the other contestants below.

Wondering what the best stocks to buy for next year are? Well, look no further than the 10 Best Stocks for 2012.

This InvestorPlace feature lists 10 long-term investments from a group of money managers, market experts and financial journalists. The 10 Best Stocks for 2012 is meant to provide buy-and-hold picks you can purchase now and sit on for a year — ideally, winding up richer on the other side.

The buy list this year is a diverse group of stocks — from banks to technology, from emerging markets to Dow components, from old favorites to a stock that went public just a few months ago.

Throughout the year, the writers will regularly offer updates on the good, the bad and the unexpected as it relates to their best stock for 2012. We’ll find out in a year who had the best pick — but first, let’s examine each writer’s recommendation and what made them pick their stock as the best investment for the New Year:

Best Stock for 2012: Turkcell

Turkcell TKCMoney manager and stock picker Charles Sizemore, CFA, picked Visa (NYSE:V) as the single-best stock to buy and hold for all of 2011 — and thanks to market-trouncing returns of 40% year-to-date, his Visa pick was the winner among 10 picks in our similar contest last year.

This year, Charles gets a purer play on emerging markets with telecom stock Turkcell Iletisim Hizmetleri AS (NYSE:TKC), a mobile phone operator more commonly known just as “Turkcell.”

Yes, there is unrest in the Middle East and in the euro zone right now. But as Charles writes, this means you can buy a great company at a fire-sale price.

“If you believe, as I do, that Turkey has one of the brightest futures of any country on the planet, then the crises on Turkey’s borders should be viewed as a phenomenal opportunity to buy shares of some of Turkey’s finest companies,” Charles writes. “And my choice for 2012 is Turkcell.”

Read Charles’ complete recommendation on Turkcell.

Best Stock for 2012: Caterpillar

Caterpillar Inc. (NYSE:CAT)Investor and CBS MoneyWatch columnist Dan Burrows picked industrial giant Caterpillar (NYSE:CAT) as his best stock for 2012.

His reasons? Dan says CAT stock was oversold during the summer volatility, has good fundamentals (including retail sales that grew 31% in October) and a bargain valuation with a forward price-to-earnings ratio of about 10.

“Wall Street’s mean (and median) price target for Caterpillar currently stands at $114.50, according to Thomson Reuters data. Add in the 2% yield on the dividend, and the stock offers an implied return of 28% in the next 12 months or so,” writes Dan. “Not too shabby for a company with a market cap of more than $58 billion.”

Read Dan’s complete recommendation on Caterpillar.

Best Stock for 2012: FedEx

FedEx FDXCNNMoney’s Paul R. La Monica said, “When I was asked to pick one stock to write about for InvestorPlace that I was confident would do well next year, I immediately started thinking of companies that should benefit from a steadily improving U.S. economy.”

At the end of his deliberation, Paul settled on FedEx (NYSE:FDX).

Don’t think this is just a play on a broad-based recovery, though. A discounted P/E ratio vs. rival UPS (NYSE:UPS), a strong dividend history, recent rate increases and the lack of competition from a U.S. Postal Service in disarray are all reasons to be bullish on FedEx.

“FedEx may not be flashy. But that’s kind of the point,” Paul writes. “In a market where volatility seems to be the new black, you could do a lot worse than a stable blue chip with steady earnings growth.”

Read Paul’s complete recommendation on FedEx.

Best Stock for 2012: Hershey

Hershey HSYRenowned trader, journalist and money manager Jon Markman has a sweet play for you in 2012: confectioner Hershey (NYSE:HSY).

Why this consumer stock? Well, because in the short-term Jon is decidedly bearish on just about all corners of the market. The euro zone debt crisis will continue to rock Europe and subsequently affect nations that export goods there or rely on plush government subsidies from the content.

In fact, Jon thinks that in the short term, “the simplest trades next year will likely be short iShares Europe (NYSE:IEV), short iShares Emerging Markets (NYSE:EEM) and short solar energy equipment producers like First Solar (NASDAQ:FSLR).”

But what does this mean for buy-and-hold investors? Simply put, get defensive with consumer staples stocks.

For those who think that chocolate is discretionary, Jon adds, “Well, try explaining to my daughter that chocolate isn’t a household staple.”

Read Jon’s complete recommendation on Hershey.

Best Stock for 2012: Capital One

Capital OneBanks aren’t exactly super popular right now, so it might surprise you to see senior analyst Philip van Doorn of TheStreet picking Capital One Financial (NYSE:COF) as his best best for 2012.

But a closer look at the stock shows a lot to be bullish about, even as the rest of the financial sector melts down. Namely, strong fundamentals and a historically low valuation and book value.

Capital One also has two very important mergers in the works that will provide future growth beyond its generally well-run banking operations.

Philip is adamant that this is not just a dumpster dive, saying “the most important factor in Capital One’s strong performance this year is its outstanding earnings performance.” Compared with the big banks on Wall Street, COF is in a class of its own.

Read Philip’s complete recommendation on Capital One.

Best Stock for 2012: Mako Surgical

Mako SurgicalDavid Gardner knows a thing or two about picking stocks. As co-founder of The Motley Fool, he is the brains behind the innovative Motley Fool CAPS rating system. And from his own research and what other investors are saying, David thinks he has a quite a pick for 2012 in Mako Surgical (NASDAQ:MAKO).

What makes Mako special? It’s an innovative medical device company that has revolutionized joint replacement. It’s not profitable yet, but the potential is huge, and stories of treatments and recovery are quite dramatic.

“It’s a long way from here to there, but for the speculative portion of your portfolio, MAKO could richly reward a little patience,” David writes.

If you don’t mind taking a little risk with your investments in 2012, consider this up-and-coming medical company.

Read Dave’s complete recommendation on Mako.

Best Stock for 2012: Microsoft

Blogger, author and founder of Stockpickr James Altucher joined a similar InvestorPlace.com feature in the beginning of 2011, picking one stock to buy and hold all year. Back then, he picked Microsoft (NASDAQ:MSFT) — and his choice is the same a year later.

Similar to his previous write-up, the highlights of this year’s recommendation include:

  • 8x earnings
  • Huge stock buybacks
  • Secret weapon: Skype replaces all smartphones within next five years

The idea of Skype taking over the mobile market is intriguing, considering voice represents so little of what we can do with our smartphones these days.

Read James’ complete recommendation on Microsoft.

 

Best Stock for 2012: Arcos Dorados

Arcos Dorados ARCOJosh Brown, adviser at Fusion Analytics and the author of The Reformed Broker blog, picked freshly minted Arcos Dorados (NYSE:ARCO) as his top pick for 2012. ARCO is the largest McDonald’s (NYSE:MCD) franchisee in the world with more than 1,750 locations, largely in Latin America.

Arcos Dorados went public in April and has been up and down ever since — not a newsflash, considering the volatility of the market in general. But in the new year, Josh is expecting the stock to take off due to four factors:

  1. Expanding consumer spending in Latin America
  2. The ferocity of McDonald’s as a global brand
  3. Growth within a defensive sector
  4. The comeback potential for emerging-market equities in 2012

If you’re sick of trying to bargain hunt in struggling U.S. blue chips, and if you aren’t afraid of looking for growth abroad, ARCO could be your best bet in the new year.

Read Josh’s complete recommendation on ARCO.

Best Stock for 2012: Alcoa

Alcoa AAAs with previous picks Caterpillar and FedEx, InvestorPlace.com editor Jeff Reeves has leaned in favor of broad economic recovery with his recommendation of aluminum giant Alcoa (NYSE:AA).

Not only will growth in demand and higher prices result in bigger Alcoa profits, but overly negative sentiment has provided a great entry point, Jeff writes.

“Yes, big problems persist in the global economy, and aluminum demand and prices remain weak as a result,” he writes. “However, Alcoa hasn’t seen the $9 level since spring 2009. Are the macroeconomic fears really worse now than in 2009?”

In addition to valuation, Jeff likes Alcoa’s improving earnings, dividend potential, streamlined operations and hope for better margins in 2012.

Read Jeff’s complete recommendation on Alcoa.

Best Stock for 2012: Banco Santander

Banco Santander STDAccording to longtime stock picker, financial columnist and money manager Jim Jubak, your best bet for 2012 is a European bank. Really!

It’s an aggressive play, but Jim’s faith in Banco Santander (NYSE:STD) comes from a lot of number crunching — and the idea that as bad as things are over in the euro zone, they aren’t as bad as you think.

“The worry about European banks right now is that they can’t raise capital in the financial markets,” Jim writes. “During the past two quarters, Banco Santander has very clearly demonstrated that this bank doesn’t fit that profile of worries.”

It has attractive assets to sell if it has to, Jim says, and that’s on top of accessing credit markets just fine at the present — on top of $8 billion in free cash flow that shows a nice cushion for STD. The only catch is that Banco Santander holds almost $50 billion in Spanish government debt.

“If you think Spain will have to write off part of that debt, then Banco Santander sure isn’t the pick for you,” Jim writes. “If you think Spain is in better shape than Italy (or Greece), I think that in Banco Santander you’re looking at one of the best performers in 2012.”

Read Jim’s complete recommendation on Banco Santander.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Charles Sizemore in the Media

Charles Sizemore was quoted in the recent Reuters article on exotic ETFs: “Investors develop taste for exotic, far-flung ETFs

Excerpt:

But some investors criticized the combination of countries in the First Trust fund resulting in its memorable acronym. “BICK” was a twist on the “BRIC” theme popular last year, swapping South Korea in for Russia.

“The popularity of this would seem to have more to do with the catchy name than with the underlying rationale,” said Charles Sizemore, who runs Sizemore Capital Management in Dallas. “Why Korea and not South Africa? Is ‘BICSA’ not marketable?”

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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