Posted on November 25
The retail companies in the Standard & Poor’s 500-stock index have outperformed the broad market during the downturn. The S&P Hypermarkets & Super Centers Index, which tracks just two retailers—Wal-Mart and Costco—has risen 9% since the end of 2007. But consumer spending has yet to pick up, and investors are probably better off buying a diverse basket and forgoing bets on individual stocks.
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Shopping Overseas
Investing in foreign-based retailers can be difficult, since many aren’t listed on U.S. exchanges. But the SPDR S&P International Consumer Discretionary Sector ETF allocates 17% to companies such as Swiss watchmaker Swatch Group and Fast Retailing, operator of the Uniqlo chain.
By Tara Kalwarski
Broad Buys
These three products track retail companies in the U.S. Their various strategies may result in widely different returns.
Posted on November 19
Dutch conglomerate Philips is weathering the recession far better than it has previous downturns. Credit the improved resilience to Philips' new streamlined focus. Over the last decade the company has morphed from a high-volume electronic-components maker into a consumer-focused, brand-driven company, says London-based Sanford C. Bernstein senior analyst Martin Prozesky. By ditching its businesses in highly cyclical industries such as semiconductors, components, and phone headsets, Philips removed much of the extreme earnings volatility that had been its hallmark. It used the proceeds from those divestments to bolster its three core businesses: health care, consumer appliances and electronics, and lighting.
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Video: Investing in Philips
In the long run, the growth opportunities are immense. After all, the U.S. population, and that of many other developed nations, is aging, and health-care costs are rising. That is likely to increase demand for Philips' health-care products such as remote monitoring devices for stroke patients. And the growing interest in energy efficiency is expected to drive future growth of the next generation of lighting known as light-emitting diodes (LED), a major focus for Philips' lighting unit.
The downside? It will take time for those trends to translate into a further pickup in Philips' share price. In recent years the company kept investors satisfied with consistent dividends and a sizeable share buyback program. The dividend remains safe. But in the short term, all three of Philips' businesses face serious pressures.
With LEDs, lighting faces the biggest technological innovation since the invention of the incandescent bulb, but amid the most difficult recession in recent memory. "The entire business model is shifting from one built around simply replacing bulbs to one in which lights are integrated into buildings, making it highly dependent on the construction cycle," says Prozesky.
A SHIFT UPSCALE
Consumer Lifestyle, Philips' appliance and consumer-electronics unit, also faces challenges. The company stopped making TVs worldwide, preferring to outsource manufacturing and concentrate on research and development and marketing. Now it's focusing on higher-end plasma and LED TVs as well as more upscale appliances including espresso makers and sonic toothbrushes. It is continuing to acquire niche companies, such as Avent, a mother and baby company, and Saeco, an Italian espresso maker. Still, analysts say there needs to be a dramatic pickup in premium discretionary spending before that business returns to growth.
While health care is expected to be a major driver of Philips' earnings and share price, the industry has its own set of thorny issues. A big one: U.S. health-care reform and what it will mean for insurance reimbursement policies for consumer health-care products. Also, governments and hospitals worldwide face financing constraints that could continue to crimp sales of medical equipment. And Philips' rivals General Electric and Siemens are making significant inroads into the home health-care market, which Philips used to dominate. "The intense focus on the health-care business since 2008's third quarter has acted as a drag on share price," says Peter Olofsen, an analyst at Kepler Capital Markets in Amsterdam.
After hitting bottom in 2009's second quarter, when sales plunged 19%, Philips' revenue growth is expected to remain negative for the remainder of 2009, according to analysts. In the third quarter, the decline slowed to 11%. Even so, Philips' shares have gained 30% so far this year, thanks in part to its aggressive cost-cutting measures. Now, in its leaner, more focused state, the company seems to have found the right business model. But "it will take a few more quarters before Philips returns to positive growth," says Olofsen.
By Kerry Capell
Posted on November 12
Taiwanese companies got whacked worse than most during the downturn, as exports of such products as semiconductors and liquid-crystal displays plunged. Taiwan’s tech-heavy stock market fell nearly 60% from its September 2007 high to its nadir last November. Since then the Taiwan Stock Exchange index has risen about 90%.
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Video: Investing in Taiwan
Taiwan’s bourse is home to a few truly global tech companies, including the world’s largest producer of outsourced chips, Taiwan Semiconductor Manufacturing. Many of Taiwan’s major tech stocks trade as American depositary receipts in the U.S., but its market still behaves like that of an emerging economy. “Investors have to be aware that it’s very volatile,” warns Renee Hung, deputy chief investment officer at Hong Kong-based Value Partners.
After such a rapid rebound, is Taiwan’s market overheated? Not when you take into account expected earnings growth, says Mike Shiao, who manages the Invesco Greater China Equity Fund in Hong Kong. “We definitely do not think it’s expensive, though it has a 2010 price-earnings ratio of 16, compared with a non-Japan Asian average of 14,” he says. “That’s because Taiwan has much stronger earnings growth of 67%, compared with 27%” for Asia without Japan. For investors who want broad exposure to Taiwan’s market, there is an iShares MSCI Taiwan Index Fund, as well as a closed-end fund, the Taiwan Fund.
William Tung, chief investment officer of JPMorgan Taiwan Asset Management, says cost-cutting has been “a mantra” for Taiwanese stocks and that they “have fine-tuned operations so well that after the [down] cycle they are healthier than before.” Prices have fallen so much that electronics are affordable for many consumers in emerging markets, he says. Those markets account for some 50% of end demand for information technology products.
Shiao’s tech-heavy fund owns Taiwan Semi as well as electronics component supplier Hon Hai Precision Industry. Taiwan Semi got some good news recently. It won a $200 million settlement from Chinese rival Semiconductor Manufacturing International for trade secret theft. The settlement includes an option to buy up to 10% of SMIC, which would give Taiwan Semi a strong foothold on the mainland.
OVERTAKING DELL
A company Tung says has emerged from the crisis with better margins is Quanta Computer, one of the biggest makers of notebooks for Hewlett-Packard, Dell, and others. The company has won a number of new contracts for next year. Says Quanta Chairman Barry Lam: “Next year the industry will grow by 20%, and we will grow by 40%.”
Some of Taiwan’s tech companies are also poised to benefit in the post-PC era as mobile devices acquire more functions of the traditional computer. AUO, the world’s third-largest LCD panel maker, is preparing to manufacture for a rival to Amazon.com’s Kindle e-reader. AUO’s biggest Taiwanese competitor, Chi Mei, the world’s fourth-largest LCD maker and a major supplier to Chinese television makers, is benefiting from strong local demand.
Value Partners’ Hung is also keen on tech and is impressed by smartphone maker HTC. It launched the first Android smartphone last year and came out with the $180 HTC Hero for U.S carrier Sprint. Hung says the HTC Hero is giving the iPhone a run for its money.
Investing opportunities outside the tech industry are emerging as relations between China and Taiwan improve. In addition, reductions in taxes on capital gains and inheritance are helping to reverse years of capital flight and boost domestic spending. Taipei-based retailer Far Eastern Department Stores has been a beneficiary of that: Its shares have more than doubled since January.
By Frederik Balfour
Posted on November 05
Spain is expected to experience another year of economic contraction in 2010, but that bleak outlook hasn't put a big damper on the country's stocks. MSCI's index of Spanish companies lost less in 2008 than the MSCI index that tracks the European Monetary Union, and so far this year Spain's 33% gain tops the overall euro zone's 20%. By Tara Kalwarski
Related Story: Spain: Seeking New Worlds to Conquer
Video: Investing in Spain
THE HOT AND THE NOT
Financial companies in the MSCI Spain Index are projected to experience weak earnings growth in 2010, while telecom and energy companies are expected to see double-digit increases. (Data: Bloomberg; *Projected; as of Nov. 2)
ENERGY EXPOSURE
Investors can use these two funds to gain exposure to Spanish renewable-energy companies; their top holdings include EDP Renovaveis, Acciona, and Iberdrola Renovables. (Data: Morningstar)
CHARTS BY RAY VELLA/BW
Posted on October 29
With a flood of new issuance and year-to-date gains averaging 50%, there's worry of a bubble in high-yield bonds. Rising prices have sent average junk yields from 15% in February to 9% in October. Investors who still want in should proceed with caution and spread their bets. By Lauren Young, with Tara Kalwarski
Related Story: Are Junk Bonds Too Hot to Handle?
Video: Investing in High-Yield Debt
SLICING UP JUNK
These three mutual funds, which focus on higher-quality junk bonds, have delivered above-average returns over the long run and have low expenses.
HIGH YIELD'S RAPID RISE
After falling off a cliff late last year, high-yield bonds have been climbing back. Their recovery has them outpacing U.S. Treasuries and investment-grade debt.
