| Global Investing 1999 Edition |
By Andrew Leckey
Genre: Business & Money
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The world's best. That's what today's stock investors demand from the volatile, complicated financial markets. In turbulent times, they aren't concerned about geographic location, so long as a company and its stock serve up terrific potential. Putting together a portfolio of quality U.S. and foreign stocks is not just a diversification or asset allocation strategy, but an acknowledgment that quality is quality wherever it is found. If market conditions make the prices of some solid long-term choices more reasonable, so much the better.
In the midst of the economic turmoil and currency fluctuations in emerging markets and Japan, the spirited move toward growth and consolidation in European Union countries, and antitrust battles and presidential intrigue in the United States, some companies have managed to stay the course. In fact, shrewd global corporations move quickly to expand their presence in troubled areas to take advantage of bargain prices, in much the same way savvy investors do with their stock purchases. Some selections in this book are at the top of their game and their stock prices reflect that, while others have been hammered by world economic and political events. Whatever their present status may be, however, flexibility, opportunism, and patience will set winners apart from losers in today's global investment race.
The companies with the best stocks in the world have one another directly in their sights. For example, London-based food and drink giant Diageo, the result of the merger of Guinness and Grand Metropolitan, intends to make a name for itself beyond its Burger King Whopper: "Our target is to equal each of the total shareholder returns of Coca-Cola, Procter & Gamble, Philip Morris, Johnson & Johnson, and Unilever, which is a very demanding set of peers," John McGrath, Diageo group chief executive, told me firmly in an interview at his office on London's Henrietta Place, just a stone's throw from the city's bustling Oxford Street shopping district. "Everyone here is involved in this goal, and each member of our executive group participates in the review and debate about each of our businesses."
Image is everything in this new global marketplace. Even though its anti-impotence pill Viagra is the hottest drug on the planet and has bootsed company sales dramatically, pharmaceutical leader Pfizer Incorporated doesn't want to become known as a one-product company: "Our sales representatives are expected to mention our other products before they talk about Viagra," William Steere, Jr., chairman and chief executive officer of Pfizer, told me in an interview in his wood-paneled Manhattan office that overlooks New York's East River. "Not only does Viagra have a ?halo' effect that gets physicians to listen to us talk about our other drugs, but many of the patients in need of Viagra have additional ailments that require additional medications."
Having spent considerable time sitting at a television anchor desk talking with chief executive officers and overseas correspondents, as well as writing columns and books about international investing, I've learned that investor knowledge about individual world-beater companies isn't as extensive as one might think. Each day in the financial news we hear names of corporations that are making a difference in world business and economies. However, few investors know much about the comparative strengths of these companies other than the fact that one is "really big" or that it might make consumer products they're familiar with. In particular, they don't know how foreign stocks compare to those of the more familiar domestic choices in terms of their nature and growth. Even the designation of "corporation" commonly used after the names of U.S. companies varies elsewhere around the globe. For example, the designation Plc. stands for public limited company in the United Kingdom. Meanwhile, S.A. stands for Soci?t? Anonyme in Belgium, France, Luxembourg, and Switzerland, while it represents Sociedad Anomima in Spain and Latin America. A.G. stands for the term Aktiengesellschaft in Austria, Germany, Switzerland, and Liechtenstein. Finally, N.V. stands for Naamioze Vennootschap in Belgium and the Netherlands. All of the companies described in this book are worth knowing about and tracking, whatever your home country. All but one of the companies are available to investors on U.S. exchanges, either as company stocks or American Depositary Receipts (ADRs) that represent the stocks of foreign firms.
Investors often ask whether there's a growing correlation between world stock markets that makes international investing less of a diversification move than it was in the past. Asia, for example, seems to have had an impact on every part of the globe at one time or another over the past two years, although some regions, such as Latin America, were late to experience reverberations. The answer is that there's not as much correlation as you might think. It's true that on a given day when the U.S. markets tank, that event is often immediately followed by declines in Asia and Europe. On another day, Asia may lead the way with a positive move, to be mimicked by a buoyant U.S. market. On such a day-to-day basis there is indeed close correlation that's often tied to specific events, October 1987 and October 1997 being good examples.
However, if you take the last ten years or any period over the past fifty years, you'll see very little correlation. For example, over the past eight years the U.S. market has gone up sharply, while the Tokyo stock market has gone down sharply. Despite some daily or weekly corresponding moves, they have little in common. Recent world stock market results also indicate that markets truly have minds of their own. Over the past several years, the markets of Spain, Portugal, the United States, Switzerland, Sweden, and the Netherlands have been big winners, while the biggest losers have been Malaysia and Singapore. Earnings momentum, valuations, and liquidity of individual stocks are important in the selection process, and one must also keep the macroeconomic and currency fundamentals of a country in mind because growth, earnings prospects, and interest rate factors can weigh heavily on final returns.
Even among world-class companies, the competitive advantage can vary considerably. For example, because technology changes dramatically, it might take four to six years for a rival making the right moves to overtake Intel Corporation. However, it's been estimated it would take well-financed competitors more than twenty years to catch up to Coca-Cola Company. Strong market position, solid management, good cash generation, and a focus on return are common attributes of the world's best. The companies profiled in this book and their stock have performed well over time and their managements generally take a positive attitude toward shareholders. They are steady, long-term performers dominant in their fields.
Financial strength, value, expansion, competitiveness, consistency, and performance were all considered in putting together this group of companies in a mix that is twenty-six foreign companies and twenty-four U.S. companies. Since these are very different companies and competitive advantage varies dramatically among fields, it's a gut-level rather than by-the-numbers process. Watch these companies. They're all proven winners, even though some may win more or win sooner than others. Care has been taken not to either "write off" or favor regions or stock groups because of current events. These companies for the most part have diversified their efforts globally so that one downturn won't spell disaster for them. In addition, an investor shouldn't write off anything forever. Yes, Asia will come back. After all, it turned from a leader to a laggard and the reverse will occur. Yes, technology will suffer downturns, but it is, after all, our path to the future and the future is onward and upward. Although bad news can offer opportunity to buy shares at more reasonable prices in the belief that the circumstances leading to their decline will reverse themselves, you should still buy and hold. Don't try to be an active trader in international stocks based on daily, weekly, or monthly events around the globe because you won't win at that complicated game.
The trend of looking outside one's borders is on the rise. After all, products of foreign firms are used every day by consumers in other countries. Prompted by some eye-popping returns in certain world markets, foreign stocks are gradually making their way into the portfolios of sophisticated individuals. The U.S. holdings of foreign securities in particular have taken a big jump since the mid-1990s as investors who have ridden the American bull market look to spread their assets around a bit. As this interest in global investing has accelerated, U.S. brokerage firms have been rapidly expanding their research presence to meet the demands of a global client base. It used to be difficult to find any information about foreign firms, but now there's plenty. In addition, foreign firms have improved their reporting procedures and also produce company materials or Web sites every bit the equal of the best efforts of U.S. firms.
Just being invested solely in one country doesn't give you the investment pop or diversification it once did. The makeup of world stock markets is changing, with the United States now representing less than 40 percent of total world market capitalization, versus more than 50 percent in 1980. Japan has moved up to 21 percent, while the United Kingdom has inched up to 8 percent. The rest of market capitalization is widely spread among a long list of countries, none commanding more than 3 percent of the pie. Individual investors living in those countries long ago realized the need for diversification.
The leaders of giant companies seeking to spread their power around the globe know what it takes to succeed and are making an all-out effort to emulate the best of their breed. When I arrived at Diageo's London offices, the reception area of which features a running tape of food and drink commercials from around the world, I was warned that fifty-nine-year-old Group Chief Executive John McGrath was running behind schedule. However, I was greeted by him, with a smile and handshake, exactly two-and-a-half minutes late, an obvious indication this is not a man who lets time slip by even on a busy day. With slicked-back hair and round-rimmed glasses, McGrath is a jovial fellow given to quoting global CEO superstars such as General Electric's Jack Welch, especially Welch's comment that it's important to make sure people have a lot of freedom to succeed and fail. GE's and Coca-Cola's annual reports sit prominently on his desk and he thumbs through them for nuggets of truth as he makes points.
"We can definitely grow our market share at the expense of our competitors," McGrath said with a flourish of his right hand. "For example, you can expect to see greater non-U.S. growth for Burger King and Pillsbury." Pressing a blue felt-tipped pen to a large white easel propped up in the corner of his office, he drew a gradual upward curve indicating what was required to meet goals for return of a hypothetical division. The point, he emphasized, is that the division work earnestly toward its goal, not content with one-year measures, but thinking further ahead to more significant ultimate results. The shape of the curve means little, so long as the payoff occurs at the end, he emphasized.
Global companies aren't cowed by the competition, as indicated by the outspoken McGrath on McDonald's Corp.: "We don't want to become a toy store like them, with all those constant Beanie Babies and other things that people come to them for, but want to continue to grow by having people like our food best." McGrath on expanding marketing efforts worldwide, rather than presenting different commercials for various countries: "I've never seen so many different camera shots of Baileys Irish Cream being poured, which is bull, since there's no reason why we can't have one camera shot for around the entire world." As might be expected, in his opinion Diageo's stock price still doesn't adequately reflect the growth potential of its formidable brand names as a worldwide effort is made to significantly boost their outreach. It's his task to make sure it does.
Meanwhile, Pfizer is advancing into the position of premier U.S. drug company and expanding its already strong international roots rapidly through drugs such as Viagra. While longtime U.S. pharmaceutical industry leader Merck & Company is slipping a bit due to expiring patents on some popular drugs, Pfizer has little exposure to drugs losing patent protection and an unsurpassed drug pipeline that's growing faster than that of its rivals.
"Our company is becoming dominant because we didn't get sidetracked by mergers, which helped us to stay focused, and because other people had bad luck because of expiring patents," related the dapper and fit sixty-one-year-old William Steere, Jr., whose wood-paneled office has a large wall sculpture depicting all the world's continents. He noted that, despite the fact his company's acquisition of Smithkline Beecham's animal business was a success, the first year it took a lot of time to draw together two very different corporate cultures. In most really big mergers, he believes, too much time is wasted with everyone worrying about their jobs, their offices, and their futures. That keeps everyone from getting the more important jobs done. If Pfizer had a failed pipeline and low growth, he'd look for a partner, but now is certainly not the time to do so.
"In the 1990s, a company must have focus, because there's never been a time when the competition has been more fierce," declared Steere, who is looking to sell the company's medical devices business because it's not a perfect fit with its pharmaceuticals, consumer products, and veterinary medicines. "You need a critical mass in this business, but after that, size isn't that important."
What's more important is Pfizer's international marketing ability to "tease out" the differences in their products, which adds up to a big difference in everyone's perception of them, Steere contends. He also sees the dark side of increased world competition, with pharmaceutical firms now suffering pervasive thefts of their patents. For example, companies in India have been sending out bulk supplies of a Viagra-type drug; Argentina has a reputation as a big pirate due to its lack of patent laws; and Egypt is also involved in unauthorized manufacture and sales. The entire world is after the properties of the world's best.
This is a time of change for investors. The Asian crisis has sparked a new global era of fierce competition characterized by currency depreciation and extensive corporate restructuring. Some companies are employing a disciplined Six Sigma approach to bring their operations as close to perfection as possible (see page 132), others are unloading unnecessary businesses while acquiring those that provide more synergy, and others are introducing their products into as many parts of the globe as possible as quickly as they can. As the competitive advantage ebbs and flows, make sure your assets stay on an upward trajectory. Do all your homework, and realize that it is the company and its management that will ultimately determine the fate of the investor. Each of the fifty companies in this book has a different story. Some are U.S.-based, while others represent Europe, Asia, Canada, or Latin America, but all do business around the globe. Their industries range from medical products to consumer products to commodities. Some of their stock prices seem to fully reflect their prospects, while others appear undervalued. Read what they're all about, track their financial data, and decide if you think the story that interests you will have a happy ending. All these large capitalization stocks of dominant companies are readily available on U.S. exchanges as either stocks or ADRs and can easily be mixed into your existing portfolio. Whether or not you agree with all of the choices included doesn't matter. Consider this a starting point for your own personal plan for world investment domination.
Excerpted from Global Investing 1999 Edition , by Andrew Leckey . Copyright (c) 1998 by Andrew Leckey . Reprinted by permission of Little, Brown and Company, New York, NY. All rights reserved.Back to top