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October 9, 2006 10:12 pm

James Altucher: Time to move on if the party’s getting crowded

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It is really hard to have fun in a party that is too crowded to move. But that is exactly what the US markets are. You are stuck in a mindless ambient beat with 8,000 hedge funds, 20,000 mutual funds, 100,000 day traders and millions of retail traders dancing frenetically while pumped full of the random narcotics supplied by the media.

You realise the fun was over way before midnight but you are afraid to leave and miss the beating of the pinata. And when the lights turn on and the police bust through the door you’d better hope the dead body in the pool is not yours.

So I called David Riedel to find out where I should be hanging out. Mr Riedel runs Riedel Research Group and is the author of the recently published Finding the Hot Spots – 10 Strategies for Global Investing.

“Why leave the US?” I said. “There’s 6,000 public companies here. Is it really that hard to find opportunity here?”

Mr Riedel replied: “Listen, if I told you I had a stock that had potential for 10-15 per cent gain in Poland then you could say, ‘Who cares?’ But what we are seeing in these emerging economies is that all of the tools and infrastructures that catapulted the US to growth from the 1950s to the 1990s are now taking place in these markets and there is potential to find companies that are situated for multiple 100 per cent gains.”

OK, lay it on me.

“First, let’s look at India,” he said. “Not an inexpensive market at a 20 times price/earnings ratio but there are pockets of value. The Indian government is going to be pushing the development of the rural economy to avoid a crush into the cities. We’ve seen this pattern before and the same things will play out in India. We saw it in Mexico in the 1960s and 1970s and in Thailand in the 1970s and 1980s. You want to buy three types of companies in a growing rural economy – companies making fertiliser, agricultural machinery and motorcycles.”

“Why not car companies?”

“Motorcycles. These guys get some money, they buy motorcycles. That’s just the way it is.”

Mr Riedel showed me TVSM, the third biggest motorcycle manufacturer in India. It has had 32 per cent growth in the past year as it began selling its new upmarket “Apache” line. Exports were up 71 per cent year on year in August – now trading at a p/e of 8, and 6.7 time enterprise value over earnings before interest, tax, depreciation and amortisation.

“Seventy per cent of the population of India lives on farms but they only make up 22 per cent of the gross domestic product. The government is going to stimulate things in the rural areas by building roads, improving the supply-chain infrastructure, giving out tax breaks, and eliminating the middlemen by encouraging the growth of larger middlemen.

“For instance, ITC is the largest Indian cigarette company with 70 per cent market share. Indian per capita cigarette consumption is one 10th of the world average but moving up. The company has a 24 per cent return on equity and is now using their excess cash flow to diversify into hotels, retail, and other venues for taking advantage of the growing rural economy. We view this as a long-term buy.”

What about other countries?

“We like Latin America where we think the politics will be benign going into 2007. You’ve just had an election cycle in Mexico, Peru and Brazil so that’s in the past and governments in favour of capitalism won in each country.

“We like YPF, an Argentine oil and gas play. They have an $8 extraction cost and will make plenty of money with oil at $40 or $50 a barrel. Right now they trade at a p/e of just 7, well below any peers, and their shares are down 31 per cent on the year. With steady ebitda growth we also like the 9.2 per cent dividend yield.”

In Mexico, a growing economy means a growing waste management industry. Mr Riedel likes PASA, a small-cap play. After its initial public offering last November, the company missed its numbers and the stock collapsed almost 50 per cent. “We’re giving management the benefit of the doubt that they are getting their act together. And at four times ebitda, the market has priced all the bad news in.

“We also like LAN Airlines in Chile, one of the leading passenger airlines in Latin America and the main cargo operator in the region. These guys are like the JetBlue or Southwest Air of Latin America – strong business position, low-cost structure and great balance sheet. These guys are only trading at
a p/e ratio of 8.9.

“In eastern Europe we think the banks are the best way to play the growth. As the countries develop, the banks will be the ones fuelling that growth via loans. Also, the large US and western Europe banks will be going into these countries and establishing a presence by buying local players. In Romania for instance we like the Romanian Bank for Development, the second largest bank in Romania with a 15 per cent market share in terms of assets.”

Mr Riedel went on and on. I wish I had the space to write about the other 20 companies he mentioned.

I am not an expert on any of these emerging markets and many of my questions to him were like, “So China has a lot of people, right?”

But I do buy into the argument that there are pockets of value in the emerging markets, particularly if you focus on economies that are not export-driven and can get hurt by a slowing US economy. I recommend reading his book.

james@formulacapital.com

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