Investment Insights from a Peruvian Beach

The problem with taking a vacation is that, alas, you eventually have to come home. And given the ubiquity of smart phones and wifi access, you’re never really “away” to begin with.

This is good and bad, of course. When you have capital at risk, you need to be able to trade in a hurry if events take an unexpected turn. This is particularly true if you manage money for others; clients have to know that their advisor is keeping an eye on their accounts even if he is desperately trying to relax in his beachside cabana with a cigar and a mojito.

Which is, incidentally, how I spent the better part of last week. The wife and I dropped off our two year old with the inlaws and made a quick getaway to a secluded resort on Peru’s northern coast near Mancora.

Or at least it used to be secluded. A short walk down the beach was a brand new (and much larger) resort, and business was booming.

If you’ve never heard of Mancora and have never considered Peru as a beach destination, there is a reason. As beautiful as it is, it’s not particularly easy (or cheap) to get to for Americans or Europeans, and Peru lacks the internationally-recognized beach culture of, say, Brazil or Mexico.

Hemingway in Peru

There are plenty of gringos in Peru, of course. But most of them are backpacking around Machu Picchu or experimenting with Andean mysticism in a drug-induced haze. Outside of a few die-hard surfers and marlin fishermen, coastal Peru caters almost exclusively to Peruvians (Though for the history buffs out there, I’ll point out that Ernest Hemingway was well aware of northern Peru’s charms and even filmed the movie version of The Old Man and the Sea from Cabo Blanco, a small fishing village about 20 miles from Mancora.)

All of this brings me to the point of this article. Unlike many resorts in the tropics, Peru’s beach resorts tend to attract the country’s native citizens. And as incomes rise in Peru and more and more middle- and upper-class Peruvians enjoy the disposable income for a beach holiday, coastal Peru is enjoying quite a boom. Prices at the nicer resorts start at around $100 per person per night, which is no small sum of money in a developing country. And prices have continued to rise even as the number of beds available has exploded.

The same can be said of urban Lima. As demand for upscale apartments in the trendy Miraflores and San Isidro districts has far outstripped supply, construction has spilled over into neighboring districts. And in Trujillo, the northern city where my inlaws live, the rate of new construction is such that I hardly recognize the place each time I visit.

The rise of Peru’s middle classes—and of their contemporaries across the developing world—is real. The question is how we can profit from it as investors.

Most emerging market funds and ETFs tend to be heavily weighted in resource companies and banks that lend to resource companies—hardly the kind of exposure we are looking for. Emerging Global Advisors has taken a big step towards remedying this with its popular Emerging Market Consumer ETF ($ECON) and Emerging Market Domestic Demand ETF ($EMDD), both of which invest exclusively in emerging-market companies with exposure to domestic consumers. I believe both ETFs are good candidates for the emerging-market allocation of your portfolio.

Another approach I like is getting access to emerging-market consumers indirectly through the shares of attractively-priced American and European companies that get a large percentage of their sales from emerging markets. Companies like Dutch megabrewer Heineken ($HINKY) and Anglo-Dutch consumer products company Unilever ($UL) would certainly fit the bill.

As I wrote in early August, emerging markets are attractively priced and, for the most part, out of favor. This would seem to me to be a fine time to “risk up” by adding a little more emerging market exposure to your portfolio.

Oh, and if you feel like doing a little primary research, northern Peru is pleasant this time of year.

Disclosures: Sizemore Capital is long ECON, HINKY and UL. This article first appeared on MarketWatch.

Visa: A Gold-Medal Opportunity

As I write this article, China has a slight lead on the United States in Olympic gold, 34-30, but anything can happen over the next week.

But whichever country leaves London with the bigger stash of medals, Visa (NYSE:$V) will be accepted in either of them.

In fact, Visa is accepted in virtually every country represented in the 2012 Summer Games.

Visa has a long history with the Olympics. The company is a major sponsor this year, just as it has been for 26 years now. It makes sense; a company with one of the most global brands in history making itself seen as a patron of the ultimate global sporting event.

It is Visa’s global reach that makes it one of the most attractive growth stocks for the next decade. As I noted in a recent article, Visa benefits from two overlapping macro trends.

First, irrespective of what happens in the U.S. economy or how the eurozone crisis unfolds, incomes are rising in emerging markets. Visa is projected to get more than half of its revenues from outside the United States by 2015, and most of this will come from emerging-market card-swiping.

The second theme is the continued growth of electronic payments at the expense of cash and checks; call it the “death of cash.” This is a trend that still is playing out in the United States, where roughly 40% of all transactions still are done with cash or check, but the transformation is more obvious in emerging markets. When I visit my wife’s family in South America, we still have to remember to carry cash. I don’t think this will be true in another five years.

Card acceptance is a virtuous cycle; the more consumers request to pay with plastic, the more retailers feel obligated to oblige. At the same time, the more retailers who accept plastic, the more convenient it becomes for consumers to leave their cash at home.

Plus, it’s safer to pay with plastic. The occasional story of a data breach, cardholders have very little risk of theft, as they are not liable for fraudulent purchases. Alas, there is no one to reimburse you if a thief steals a roll of cash.

And given that you are reading this article online, we should not forget the role that Internet commerce plays. Though still small when compared to the broader brick-and-mortar retail economy, e-commerce is becoming a larger piece of the pie every year. Traditional credit and debit card companies benefit from this, as do relatively new upstarts like eBay’s (NASDAQ:$EBAY) PayPal.

So, there you have it — more shopping by emerging-market consumers and a higher percentage of existing shopping switching to plastic. An investment thesis in fewer than 20 words.

Right now, Visa and rival MasterCard (NYSE:$MA) are a little pricey at 18 and 16 times forward earnings, respectively. So you might want to wait for a dip before buying. But if I had to choose one stock to hold for the next 10 years, Visa would be near the top of my list — even at current prices.

Disclosures: Sizemore Capital is long Visa.  This article first appeared on InvestorPlace.

Africa: The Last Investment Frontier

If you are the adventurous sort and happen to find yourself strolling the streets of Tripoli, Libya, you may smell the familiar aroma of cinnamon buns baking. U.S. bakery chain Cinnabon opened a new café in downtown Tripoli, making it the first American franchise to set up shop in the country. You can bet that more will be following.

With many of the traditional East Asian and Latin American emerging markets now comfortably developed into middle-income nations, investors and entrepreneurs are shifting their attention to the next big growth market—Africa.

In a year in which growth forecasts have been slashed across the globe, Africa has been surprisingly resilient. Meanwhile, the IMF forecasts that Africa’s growth rate will be 5.4% this year and 5.3% in 2013. For a continent best known for its chronic civil wars and HIV epidemic, that’s not half bad at all.

The African continent has a population of over a billion people, making the continent bigger than the United States and European Union combined. But before we get too excited, we should remember that the entire lot of them are not exactly queuing up to buy iPads and frappucinos. The World Bank estimates that 47% of Sub-Saharan Africans live on less than $1.25 per day.  Living standards are higher in North Africa, though North Africa is certainly no stranger to poverty either.

Before you write Africa off as being too poor to be worthy of consideration, consider that India—which has been a favorite emerging market destination for investors for years—has nearly comparable levels of poverty. The World Bank estimates that 36% of South Asians live on less than $1.25 per day. And we should also remember that China had similar levels of poverty just a few decades ago.

Investors looking to invest in the rise of the African consumer can go about a couple different ways. The iShares MSCI South Africa ETF ($EZA) is one popular option, though this ETF is concentrated in one country—South Africa—and in the mining industry, which is notorious volatile and a poor proxy for rising African incomes.

The Market Vectors Africa Index ETF ($AFK) is a more diversified option in that its mandate covers the entire continent, though it is a little too heavily allocated to the banking sector for my liking. AFK has more than 40% of its assets in financials. I would prefer to see larger allocations to consumer-focused companies such as Nigerian Breweries or Maroc Telecom.  Still, all things considered, AFK is a decent way to play the African growth story.

Perhaps the best way to get access to Africa is via the shares of high-quality Western firms actively engaged there. A fine example would be British high-end spirits group Diageo ($DEO). I highlighted Diageo’s booming whisky sales in Africa last year (see Into the Wilds of Africa), and the company continues to be one of my very favorite ways to get “back door” exposure to emerging markets.

Another option would be SABMiller ($SBMRY), which is the second largest beer brewer in the world. SABMiller gets roughly a third of its profits from Africa, and that number should only grow with time

As a note of caution, the U.S. ADR shares are thinly traded, so make sure you use a limit order. Investors with access to foreign markets may prefer to buy the London-traded shares.

Disclosures: Sizemore Capital is long DEO.

SUBSCRIBE to Sizemore Insights via e-mail today.

Visa and MasterCard: Underlying Macro Trends Still in Place

“Gimme what I need, uh, MasterCard or Vi-suh.”

From Wyclef Jean’s “Perfect Gentleman”

The U.S. consumer is in a bit of a pickle.  Jobs are not particularly easy to come by—the June jobs report showed unemployment sticking at 8.2% and only 80,000 new jobs created for the month—and the economy remains sluggish. 

True, the average American family carries less debt than they did a few year years ago, but their net worth hasn’t exactly grown much either. 

In short, the prognosis for the consumer is bleak. 

Retail stocks have held up relatively well, all things considered, though higher-end luxury retail has taken a beating.  Long-time Sizemore Investment Letter recommendation Coach ($COH) is down nearly 30% from its 2012 highs, and competitor Michael Kors ($KORS) is down by over 16%.  Investors fret that a slowing economy—and in particular slowing Chinese and emerging market economies—will lead to a disappointing string of quarters for purveyors of expensive discretionary purchases.

Yet amidst the bearishness towards bling, Visa ($V) and MasterCard ($MA) have been notable bright spots.  Visa is just 1-2 good trading days away from a new all-time high, and MasterCard is not far behind. 

There are a lot of high expectations built into the stock prices of both credit card companies.  Visa sells for 19 times trailing earnings and MasterCard for a lofty 27 times trailing earnings.  Forward estimates put the ratios at a more reasonable 17 and 16 times earnings, respectively, though both are well above the average for the S&P 500.

The optimism is not unwarranted.  Both companies are debt free. Visa enjoys mouth-watering operating and profit margins of 60% and 42%, respectively, and MasterCard’s profitability is only a hair’s breadth lower.   Both also enjoy returns on equity that would be the envy of any company outside of the technology sector.  In short, both companies deserve to trade at a premium to the broader market.

Still, with so much optimism baked into the stock price, a slight earnings miss by either could send shares tumbling in the short-term.  This is always the risk you run when buying a “hot” stock, and I would be wary of it as we enter earnings season.

Any sustained weakness should be viewed as a fantastic buying opportunity.  When I made Visa my pick in InvestorPlace’s 2011 “10 for 2011”stockpicking contest, I noted two durable macro trends that are still very much in place:

  1. The   transition to a global cashless society
  2. The rise of the emerging market consumer

The first point should be obvious.  Even in the United States, where credit and debit cards are ubiquitous, roughly 40% of all transactions are conducted with cash or paper checks.  Not all transactions will ever be captured with credit and debit cards, of course, but with internet commerce growing relative to “bricks and mortar,” you can bet that the percentage will grow. 

Consumers without access to traditional credit or banking services are embracing prepaid cards, branded with the Visa and MasterCard logos, and both companies are experimenting with ways to let consumers pay at retail cash registers using their mobile phones. 

This is a long way of saying that even if overall consumer spending growth is tepid, growth in electronic payments has plenty of room to grow.

The second point is the one I find the most promising, however.  Credit and debit card usage is soaring in virtually all major emerging markets as incomes rise and consumers join the ranks of the global middle class.  Both Visa and MasterCard stand to benefit from this trend, though Visa has the better presence globally.  Visa expects to get more than half of its revenues from overseas by 2015, and the overwhelming amount of this will come from emerging markets. 

Visa is what I call a classic “emerging markets lite” investment.  You get all the benefits of emerging markets growth but without the volatility and headache of investing in emerging markets directly.

Both Visa and MasterCard are due to report earnings within the next month.  I will be curious to see how the management of each addresses the effects of the economic slowdown in China and the rest of the developing world.

I suspect that, once the numbers are sorted, it will be clear that Chinese imports of iron ore and copper are in a protracted decline, but Chinese credit and debit card swiping are healthier than ever. 

In the meantime, I reiterate my recommendation to buy shares of both companies on any protracted weakness.

Disclosures: Sizemore Capital holds shares of Visa and Coach.

If you liked this article, consider getting Sizemore Insights via E-mail. 

Diageo: The Ultimate 12- to 18-Year Play

Have you ever noticed that new “premium” vodka brands seem to pop up every other year, yet the quality scotch brands you see on shelves today are the same ones you might have seen in your grandfather’s liquor cabinet?

There is a reason for that. Vodka is colorless, flavorless and can be mass produced from scratch in a matter of days. For that matter, you can make it in your bathtub over a long weekend with basic ingredients from your kitchen.

Making an enjoyable scotch, on the other hand, takes years. In fact, whisky cannot technically be called “scotch” at all unless it has been aged in an oak cask for a minimum of three years.

Of course, if you offer a gentleman a scotch that has only been aged three years, he might take it as an insult. A decent scotch—be it blended or single malt—will generally be aged anywhere from 12 to 25 years or more.

Anyone can start an exclusive new vodka brand given a sufficient pool of capital. Consider the example of Grey Goose. The American billionaire Sidney Frank created the brand in 1997 and sold it to Bacardi just seven years later for a quick $2 billion. Had he opted instead to create a new scotch brand, he would not have lived long enough to enjoy its success. When the late Mr. Frank passed away in 2006, his first batch of scotch would have still needed another 5 years or more of aging to be taken seriously.

This is a significant barrier to entry for would-be newcomers. Imagine an enterprising scotch enthusiast attempting to start his own distillery today. What bank or venture capital firm would put up the money to get a distillery of any size in production given that the company wouldn’t have a sellable product for at least a decade?

Perhaps you could get the enterprise off the ground faster by buying existing aged inventory from a small independent distillery, but this is not something that would be feasible on an industrial scale. At best you would have a small craft business.

This brings me to a recent headline on Diageo (NYSE:$DEO) the British-based international spirits conglomerate and owner of the ubiquitous Jonnie Walker brand. In addition to Johnnie Walker, Diageo owns the J&B scotch, Crown Royale Canadian whiskey, Ketel One and Smirnoff vodka, Jose Cuervo tequila, and Bailey’s Irish Cream brands (among many others) and acts as distributor for the assorted cognacs of Moet Hennessy.

Diageo is investing $1.5 billion to expand its scotch production over the next five years. The news sent shares of Diageo’s stock price higher as investors interpreted the announcement as a bullish call on the company’s future.

Think about it. Diageo’s management must feel pretty confident about the future to expand its scotch operations on a grand scale. While some of the production used for the lower end Red Label line might be available in as little as 3-5 years, it will be at least 12 years before any whisky made in the new distilleries will be eligible to be used in a bottle of Black Label—and nearly three decades before it could be used in a bottle of the ultra-high-end Blue Label.

I have every reason to believe that this optimism is warranted. Over the past 5 years, the company has grown its top-line sales by over 50 percent—and the past five years have been rather challenging for most consumer-related businesses.

Much of this growth has been due to high demand from emerging markets—which already constitute 40 percent of Diageo’s sales and continue to take a bigger slice every year.

Call it the legacy of the British Empire. The United Kingdom controlled 25 percent of the world’s land mass at its apogee, and its influence spread far wider. And everywhere those ambitious British colonials went, they brought with them a thirst for scotch whisky. Outside of the United States—where Kentucky bourbon whiskey and Tennessee whiskey are popular—scotch is generally the only game in town.

As incomes continue to rise in China, India, Latin America and other brand-conscious emerging markets, so do standards of taste. Ordering a premium spirit or offering a bottle as a gift is a sign that you have “made it” in life. This is a long-term macro theme with decades left to run—which is perfect for Diageo’s premium scotch production timeline.

I should also add that Diageo is an International Dividend Achiever, meaning that the company has raised its dividend for a minimum of five consecutive years. I expect Diageo to continue raising its dividend at a nice clip in the years ahead. The stock currently yields 3.0 percent.

I won’t say this about too many companies, but Diageo is a stock that you can buy and forget. I recommend the stock for your core, long-term portfolio—and I also recommend you take the time to enjoy a bottle of Black Label, preferable with full-bodied cigar. And if Diageo performs as I expect, use your dividend proceeds to upgrade to a bottle of Blue Label.

Disclosures: Sizemore Capital is currently long DEO. This article first appeared on InvestorPlace.

SUBSCRIBE to Sizemore Insights today via e-mail.