Luxury: Buy What China’s Wealthy are Buying

“A few years ago, I said: if people do not watch it, Europe will become an open-air museum for traveling Chinese. Well, we are halfway there.”

The quote above was from a Financial Times interview with Johann Rupert, Chairman of the Swiss-based Richemont (Switzerland:CFR), the second largest luxury goods group in the world (see “Tourist Buyers Pose Sales Conundrum”).

The outlook for Europe is not particularly good these days. Even if the Eurozone survives its current crisis—and I believe it will—real domestic growth will be hard to come by going forward.

Debt deleveraging, aging demographics, and—in some cases—shrinking populations suggest that Europe may never again be a major engine of consumer demand, or at least not in the lifetimes of most people reading this article.

Many demographers have warned that Europe risked becoming a “cultural theme park” for American, Chinese, and other foreign tourists, or an “open air museum” as Mr. Rupert suggests. “Giant luxury shopping mall” might be a better description, however.
Mr. Rupert ought to know. Though Richemont is based in Europe, the biggest buyers of the group’s expensive wares—which include the Cartier and Mont Blanc brands among many others—are Chinese nationals.

Richemont is not alone. Barron’s recently reported that Italian luxury group Prada (Hong Kong:1913) gets 37% of its revenues from Europe, but only 17% of that is actually sold to Europeans. Most of the rest is sold to Asian and specifically Chinese tourists. Counting the nationality of the buyer rather than the location of the sale, 57% of the group’s revenues are estimated to come from non-Japanese Asians and another 12% come from Japan. All told, nearly 70% of Prada’s sales go to the East.

Precise figures are impossible to come by, but it is believed that half of the luxury goods sold in Europe in 2011 were to tourists from mainland China. And this does not include sales made in stores within China itself, which are growing at a startling clip.

Though the United States has its share of luxury brands, such as handbag maker Coach (NYSE:$COH), the luxury goods industry is concentrated in Europe, which also happens to be ground zero of the biggest sovereign debt crisis in generations. And with this crisis comes incredible opportunity.

I’ve never been comfortable investing heavily in emerging markets. The lack of transparency and corporate governance was always a sticking point for me. I’ve always preferred to invest indirectly, through the shares of Western firms with a large and growing presence in emerging markets (call it “Emerging Markets through the back door”).

The luxury goods sector is particularly well suited for this strategy because not only does it target emerging market consumers, it targets wealthy emerging market consumers that tend to weather economic storms better than the rest.

In recent articles, I have suggested that readers accumulate shares of European and particularly Spanish blue chips on dips (see “How to Invest for European Armageddon”). Today, I recommend that readers take their pick of Europe’s finest luxury goods companies.

For those investors with access to foreign markets, I recommend shares of both Prada and Richemont. Swatch Group (Switzerland:UHR), the maker if the Omega brand worn by Daniel Craig as James Bond, is also a fine choice.

For those limited to stocks trading in the U.S. market, the shares of the LVMH Moet Hennessey Louis Vuitton ADR (Pink:$LVMUY) are a fine option as well. The shares are liquid enough for most investors to trade without any issues, but investors trading in large lots should use a limit order nonetheless.

China’s economy is slowing, and this has caused a stampede out of most luxury names in the second quarter. Alas, it is remarkable how short some investors’ memories can be.

We’ve seen this movie before. Last summer luxury firms sold off heavily as well, as…you guessed it…fears of a European meltdown and a slowing in China caused investors to dump the sector. But then, a funny thing happened. The slowdown in luxury sales never materialized and 2011 proved to be the strongest year in history for the sector.

Will 2012 prove to be as good of a year for the sector? Only time will tell, but I have no reason to believe this time will be different. Take advantage of any short-term weakness to accumulate shares of high-profile European luxury brands.

Disclosures: Sizemore Capital currently holds positions in COH and LVMUY. This article first appeared on MarketWatch.

Telefonica: Latin American Growth, Crisis Prices

“Buy low and sell high” is the standard advice of any value investor. It can also be remarkably hard to put into practice.

You see, we humans are herd animals, and we tend to think and act as groups, particularly during times of stress. Call it the primal human instinct to seek strength in numbers.

Unfortunately, while this instinct may ensure our survival during times of war or natural disaster, it handicaps us as investors. When we see others panicking we too sell in fear or stand paralyzed in indecision at exactly the time we should be buying with both fists.

All of this is a lengthy introduction to the subject of this article, Spanish telecom giant Telefonica (NYSE:TEF).

Telefonica has had a rough year. The price of its U.S.-listed ADR are down nearly 70% from their pre-2008 highs. The domestically-traded shares have fared slightly better do to the lack of currency movements, but results have been dismal nonetheless.

Spain’s crisis has become Telefonica’s crisis. As the most liquid stock in the Spanish stock market, Telefonica has become a proverbial punching bag and an outlet for traders wanting to short the embattled Eurozone country.

This article was published on GuruFocus.  To read the full article, please see The Case for Telefonica.

Visa, MasterCard Still Charging Forward

Credit card rivals MasterCard (NYSE:$MA) and Visa (NYSE:$V) released earnings on Wednesday, and both knocked the ball out of the park. We’ll start with MasterCard.  This smaller of the two rivals enjoyed earnings growth of 25% in the first quarter and a 17% increase in worldwide purchase volumes.  Not to be outdone, Visa announced a […]

Credit card rivals MasterCard (NYSE:$MA) and Visa (NYSE:$V) released earnings on Wednesday, and both knocked the ball out of the park.

We’ll start with MasterCard.  This smaller of the two rivals enjoyed earnings growth of 25% in the first quarter and a 17% increase in worldwide purchase volumes.  Not to be outdone, Visa announced a 30% rise in earnings per share on an 11% rise in payments volume.

I admit, I’m a little partial to Visa.  The stock was my pick last year in InvestorPlace’s “10 Stocks for 2011” contest, and it crushed the competition.  (Alas, Turkcell (NYSE:$TKC), my pick for 2012, is off to a slower start—for now).

But as great as Visa’s performance has been over the past year and a half, MasterCard has been the better stock.

As a smaller, nimbler company, MasterCard’s growth has been more impressive than Visa’s in recent years, and MasterCard suffered less fallout from the Dodd-Frank Durbin Amendment fiasco that sought to limit the fees charged to merchants for debit cards.  Yet I contend that Visa remains the better long-term buy for reasons I’ll address shortly.  First, I’ll throw a bone to MasterCard bulls.

One of the provisions of the Durbin Amendment allowed merchants to choose the network that they used to process debit card transactions.  As the bigger of the two networks, Visa had far more to lose than MasterCard, and MasterCard has profiting handsomely at Visa’s expense.  Visa’s debit volume grew by only 2% for the quarter, while MasterCard’s grew by over 20%.  MasterCard will likely continue to nip at Visa’s heels for the foreseeable future in the U.S. debit market, which is the single most important segment of Visa’s business.

MasterCard and Visa have both benefitted from improving consumer sentiment in the United States and, outside of Europe, a healthier global economy.  But even if consumer spending growth is tepid in the years ahead, there is every reason to believe that both MasterCard and Visa can continue to see spectacular growth in purchase volumes (both credit and debit).

The world is going cashless.  Perhaps nothing illustrates this more than the various new iPhone credit-card-swiping apps.  Yes, next time you borrow $20 from your buddy, you can pay him back using nothing more than a credit or debit card and an iPhone.  Gotta love it.

Yet despite the seeming ubiquity of credit and debit cards, roughly 40% of all transactions are still carried out by cash and paper checks in the United States.  Remember, the United States is the most heavily penetrated of all major markets, so the percentage is much lower virtually everywhere else in the world.

This brings me to my primary reason for favoring Visa over MasterCard—Visa is far better positioned to profit from the rise of the emerging market consumer.

Visa already gets nearly half of its revenues from overseas, and most of this is from emerging markets. As incomes rise in the developing world, consumers have far more discretionary income than they used to, and they are spending a greater percentage of that with a swipe of plastic .

Alas, I would be remiss if I didn’t mention one big negative for Visa.  During the earnings release conference call, Visa announced that the U.S. Department of Justice was investigating the company for potential anti-trust violations related to debit card processing.  It’s too early to say how serious the investigation is or what Visa’s potential liability is, but the news sent the share price down sharply after hours.

At this stage, I do not see the investigation having a significant impact on Visa’s business, and I recommend using any weakness in the share price as an opportunity to accumulate more shares.

Disclosures: Visa is held by Sizemore Capital clients.


Investing in Switzerland

Switzerland will always have a special place in the hearts of doom mongers.   For decades its franc has been the “go to” safe haven currency when the world got dicey.   The meticulous Swiss gnomes have always had a well-deserved reputation as prudent stewards of wealth—and a well-deserved reputation for discretion and privacy.  And importantly, their […]

Switzerland will always have a special place in the hearts of doom mongers.   For decades its franc has been the “go to” safe haven currency when the world got dicey.   The meticulous Swiss gnomes have always had a well-deserved reputation as prudent stewards of wealth—and a well-deserved reputation for discretion and privacy.  And importantly, their policymakers had little tolerance for inflation.

Investors with long memories will recall that the Swiss franc was the currency of choice in the 1970s for Americans looking to escape rampant inflation (and perhaps leisure suits and disco as well).  Outside of gold Krugerrands, few other asset classes offered much in the way of protection.

Like shag carpet and other novelties from the 1970s, Switzerland is popular again.  It’s easy enough to understand why.  With the world—and particularly Switzerland’s backyard of Europe—in a prolonged period of on-again / off-again crisis, the Alpine country is viewed as a refuge.

Consider the strength in recent years of the CurrencyShares Swiss Franc Trust (NYSE:$FXF).  As the European sovereign debt crisis really started to heat up last year, the franc almost went parabolic vs. the and euro.  Unfortunately, the strength of the currency was killing exports and destabilizing the Swiss financial system.  To the detriment of investors and traders who had been piling into the franc as a haven, the Swiss National Bank came down like a hammer to weaken the value of the franc.  Yet even after the move, many trust a devalued franc over a fragile euro or dollar.   I can’t say I that don’t understand.

There is a lot to like about Switzerland as an investment haven.  It is home to some of the world’s finest multinational companies, including Sizemore Investment Letter favorite Nestle (Pink:$NSRGY), pharmaceutical heavyweights Roche(Pink:$RHHBY) and Novartis (NYSE:$NVS) and engineering juggernaut ABB Ltd (NYSE:$ABB), which is the major competitor to Sizemore Investment Letter recommendation Siemens (NYSE:$SI).

Perhaps unfortunately, it is also home to two of the largest international banks in the world, UBS AG (NYSE:$UBS) and Credit Suisse (NYSE:$CS), two institutions that gave country quite a bit of heartburn during the 2008-2009 meltdown.

Investors looking for blanket exposure to Swiss stocks could consider the iShares MSCI Switzerland ETF (NYSE:$EWL).  It is a basket of Switzerland’s biggest and most influential companies.

A note of warning on this ETF, however.  If you buy EWL, you had better like Nestle, as the food and consumer products company makes up nearly a quarter of the portfolio.  Health care stocks collectively chip in 30 percent as well.  So, well over half of the ETF is investing in defensive (if not outright boring) sectors.    This is not necessarily bad, of course.  It’s just something to consider.

Nestle has been hit in recent years by rising commodity costs and the trend of consumers trading down to generic food products.  Even so, the company has a fantastic foothold in virtually every major emerging market country, and I consider Nestle about the closest thing to a “buy and forget” company available today.  It helps that the company pays a solid dividend of 3.5 percent.

Nestle recently made a splash by announcing that it would buy Pfizer’s (NYSE:$PFE) baby food business for $12 billion.  The purchase fits well with Nestle’s existing product lines, and it further strengthens its position in emerging markets.   Roughly 85 percent of the unit’s revenues come from emerging markets, and I would expect that number to only increase with rising incomes and livings standards.

On April 19, management announced that the company would be raising the dividend by CHF 1.95.  Expect to see more of this in the years ahead.  Nestle is not a “home run” stock, but it should be a steady producer for decades to come.

ABB also announced earnings in April, with mixed results.   Revenues grew by 8 percent  for the quarter , but new orders from China—one of ABB’s key markets—were down 35 percent.   ABB, like Siemens, is a fine company with great long-term prospects in building out the infrastructure that emerging markets need to rise to developed-world status.  But with budgets tight and markets jittery, the next year may prove to be challenging.

The Swiss banks, like their American and European counterparts, also face a rocky road ahead.  Regulators are squeezing risk out of the system and banks are shrinking their balance sheets and reducing leverage—all of which is good for long-term stability.  But it’s not good at all for bank profits.

Credit Suisse revealed late the month that earnings had improved over the last quarter but were down substantially from the first quarter of last year.  Profits were 44 million Swiss francs, down from 1.1 billion the first quarter of 2011.

Overall, I continue to like Swiss stocks in general and Nestle in particular.   But given the nonexistent yields and the SNB’s recent tendencies to aggressively lower its value, I’d stay away from currency positions in the franc.

Disclosures: Charles Sizemore is long Nestle.