Two Rules for Making Stock Market Profits in the Next Decade

by Tony Sagami
 

Your town probably has a Chamber of Commerce. Even my little town of Bigfork, Montana (population 6,000) has a Chamber of Commerce.

The Chamber of Commerce isn't restricted to only the U.S. either. One of the largest chambers is located in Shanghai, China.

The American Chamber of Commerce in Shanghai was founded in 1915, was the third American Chamber established outside the United States, and is the largest Chamber in Asia. 

The Shanghai Chamber's membership is virtually a who's who of American business that includes companies from Amway to Intel to McDonalds to Xerox. So when the Shanghai Chamber surveys its members, you can bet the results tell an accurate tale of business conditions in China.

The American Chamber of Commerce in Shanghai released its 2009 China Business Report last week, and it shows that business is booming in China.

  More than 90% of the businesses surveyed reported they were "optimistic" or "slightly optimistic" about the five-year outlook going forward. That is an improvement over the 81% in 2008.

  82% expect Chinese revenues to increase in 2010 from this year.

  40% said the profit margins of their China operations in 2009 were better than their global averages.

  74% ranked China as one of their top-three expansion priorities, and 64% plan to increase their investments in China in 2010. That's an amazing statistic because 58% of the companies already increased their investment in China this year.

  Only 5% were planning to scale back their operations in China.

"Many American companies are finding that their performance in China has outshone those in other markets. AmCham Shanghai has conducted this survey every year since 1999, and optimism among American companies in China has never been higher," said Norwell Coquillard, the American Chamber of Commerce of Shanghai chairman.

Every Portfolio Needs a China Strategy

Yum! Brands, which operates KFC and Pizza Hut, has an effective and profitable China strategy.

What's this mean to you as an investor? It means that you need to review every stock in your portfolio, yes even American companies, for a China strategy.

The U.S. economy is still sick and isn't going to get better anytime soon with our runaway government spending and reckless deficits. American companies looking to grow their business better figure out a way to sell their products in China.

At the same time, American companies need to keep looking over their shoulders to make sure Chinese companies aren't going to steal their business with lower (cheap labor) production costs and lower prices.

Let me give you some examples:

China Success Example: Yum! Brands, the operator of Pizza Hut and KFC, gets more than 60% of its revenues from outside of North America and is doing big business with more than 4,000 KFCs and Pizza Huts in China. Yum! Brands has an effective and profitable China strategy.

Kentucky Fried Chicken — China Style When you travel the back roads of China like I do, lunch time can turn into a game of gastronomic Russian roulette. I've been offered grilled scorpions on a stick, dog hot pot, monkey brains, and lots of other things I couldn't begin to identify. Fortunately, the conspicuous red "KFC" and Colonel Sanders logo can easily be found on the facades of shopping centers and office buildings. When approaching such buildings, it is often easy to notice that both floors of the restaurant are packed with customers. Of all the KFCs I've visited in China, no matter what time of day or night, business was overflowing. The accessibility of the KFC restaurants is unmatched by any other fast-food chain in China. In nearly every place where there's a crowd, there's a KFC. They can be spotted just off of highways, in shopping areas, and prime tourist locations. Yum! Brands has done an excellent job tailoring this American chain to the Chinese market. The menu is different from the United States, featuring smaller-sized meals and new entrees with desserts and ingredients well liked by the locals. Better yet, according to Peking University marketing Professor Jianfeng Wu, the Chinese consider KFC to be somewhat of an upscale restaurant (in contrast to the "fast food" cliché it has in America). The menus for Pizza Hut are substantially different from that of the states, featuring bizarre ingredients such as seafood and corn (yes, corn!). The atmosphere inside is more elegant, as if it were an expensive steakhouse. The good news is that the Chinese seem to like it, as each Pizza Hut I've seen was almost as busy as the adjacent KFC.

On the flip side, here are some strategies that haven't worked out:

China Failure Example: McDonalds just reported a drop in same-store sales by 1% in Asia. McDonalds beat Yum! Brands to the punch and was one of the first American companies to make a big push in China. What McDonalds didn't realize is that Chinese greatly prefer pork and seafood to beef, and that slapping a pineapple ring and teriyaki sauce on a hamburger does not make it Asian enough for most Chinese tastes.

China Failure Example: North Carolina used to dominate the furniture industry, but low-cost competition from China has crushed the profits of U.S. furniture makers and has stolen 40% of the market share from American companies.

Clearly, if the Chinese decide they want to become a meaningful competitor in your industry ... you're in a big heap of trouble.

Two Rules for Making Stock Market Profits in the Next Decade

Here are the two most important investment rules for making stock market profits in the next decade: (1) get 'long' whatever the Chinese are buying and (2) get the heck out of any U.S. company that is fighting what will be a losing battle against cheap Chinese competition.

What are the Chinese buying? Oil, copper, natural gas, coal, gold, steel, cement, English lessons, American pizza, hotel rooms, pollution-control equipment, homes, designer clothes, gambling junkets, solar power panels, and cell phones to name a few.

All those companies spending billions of dollars to establish a business beachhead in China are there for one reason: TO MAKE MONEY. And according to the members of the American Chamber of Commerce in Shanghai, the opportunities have never been better.

Best wishes,

Tony