by Carl Delfeld, Global Markets Strategists, The Oxford Club
Thursday, August 23, 2012: Issue #1845
It was the end of innocence.
Once upon a time, I naively believed that we live in a free market global economy where companies competed fairly on a level playing field.
That was until I studied Japanese business practices for a year in Tokyo, worked with the U.S. Congress and the U.S. Treasury, and then was appointed to represent America on the board of the Asian Development Bank in Manila.
From my perch, watching how the great game is played in Washington and in capitals around the world, I learned some useful lessons:
- How companies, like a U.S. energy company I helped, snagged and financed a $100-million contract in a matter of weeks through identifying key decision makers.
- How a small, privileged elite club of families that I got to know command the controlling heights of emerging market and Asia-Pacific economies – and why what they touch turns golden.
- How companies are not treated the same at all – with some enjoying the benefits of being owned or closely allied with governments and key decision makers.
We all like to believe in free markets, but the rising countries in the Pacific Rim are playing by a different set of rules. “Crony capitalism” is one way to put it. Another is “semi-market, state capitalism.”
In a “semi-market, state-capitalism” world, governments and influential business leaders play a key role in deciding who and which companies will win or lose. This is especially true in emerging markets where 83% of the world’s consumers hold court.
This means that, unfortunately, investing in overseas companies with abundant talent and initiative, a great product or service, and the capital to execute a well-thought-out plan are sometimes not enough for big and lasting gains.
In short, it’s to your great advantage to invest in companies with strong influence within the country’s business and political power structure.
A “Blue Ocean” of Opportunity
This is one of the four drivers behind what I call “Operation Blue Ocean” – my quest to pick the stock of the Pacific Century.
Here’s a brief overview of the four drivers with their weightings in case you would like to try your hand in picking the best stock to capture decades of Pacific Rim growth:
- 40% – Strategic Importance and Preferred Status: Is the company strategically placed at the heart of blue ocean growth, providing key services tied to vital economic and security interests? Does the company’s board of directors represent a blue chip assembly of elite executives and government leaders? Do the company’s services tie in nicely into the Pacific free-trade initiatives? Do the company’s shareholders include investors who can help it overcome and even benefit from regulatory or political challenges? Does the company enjoy “home court” advantage and a wide “moat” or, even better, a monopoly or semi-monopoly position?
- 20% – Strong Fundamentals and Growth: Is the company rapidly building its book of business worldwide in areas where the growth trends are deep and durable? Does it enjoy a sterling balance sheet and a significant cash stockpile? Are its revenue and profits on a strong upward trajectory? Is the stock price moving upward and demonstrating clear relative strength?
- 20% – Significant Contracts in Pipeline: Is the market recognizing any recently signed series of substantial commercial contracts? Does the company have a clear and sizable leadership position in the industries that it competes in? Does its pipeline of contracts give it downside protection and fuel to maintain its momentum?
- 20% – Attractive Valuation: Does the company’s stock valuation trade at a deep discount to relative indices and peers compared to its record and prospects?
This is my blueprint. Make it yours…