My “Boom Chip” Blueprint

by Carl Delfeld

I have carefully studied the success of Pacific Rim tycoons, from the world's richest woman (from Australia) and Hong Kong's Li Ka-Shing to Mexico's Carlos Slim - the richest man in the world.

Some of these tycoons were born into wealth, but many come from modest backgrounds. For example, Li Ka-Shing, after his father’s death, had to leave school at the age of 14 to work 16 hours a day in a plastics factory. Slim is the son of Lebanese immigrants.

But they all share one powerful trait - they grew their fortunes by building and investing in what I call “boom chip” companies…

The best way to describe a boom chip stock is to contrast it with what is in many ways its opposite – blue-chip stocks. Blue chips are large, stable, mature companies based in Western markets with slow sales and profit growth plus dependable dividends.

One widely held blue chip is Johnson & Johnson (NYSE: JNJ). Its international sales have tripled during the past decade, but its stock has performed poorly, with an average annual return of less than 1%!

Another blue chip you’re familiar with is Kraft (Nasdaq: KFT), a bundle of blockbuster brands like Jell-O, Maxwell House, Tang, Miracle Whip and Oreos.

It’s done a bit better than JNJ…

Kraft has 12 brands generating $1 billion each year, and Tang is the most recent addition to this exclusive club. With all these killer brands aimed at emerging growth, Kraft is expected to grow revenue around 3% a year over the next three years. Not bad for a food giant.

While a stock like Johnson & Johnson or Kraft in your core portfolio is a great way to protect and incrementally grow capital, you’ll need to think a bit more boldly if your goal is to build substantial wealth.

“Be an Adventurer…”

You can put some sizzle in your portfolio by following John Train’s advice in his book Preserving Capital:

“Be an adventurer; like the American of a century ago, not his clerkish descendant of today. You must think as a builder, a conqueror.”

One way to do this is by investing in boom chip, home grown multinationals based in Pacific Rim frontier countries. These dynamic “favored” companies benefit from my Boom Chip Blueprint:

  • Durable government backing = key regulatory edge

  • Home court advantage and protected markets = much higher profit margins

  • Allied with blue-chip companies and local tycoons = clear competitive edge

  • Operate in booming markets = high and dependable growth

  • Cost advantages = bigger profits

  • Still at an early stage of their growth cycle = sustainable high growth

  • Are off the radar screen of Wall Street analysts = opportunity for value entry point

In short, “favored” boom chips offer you significant advantages, and this means big upside potential.

Let’s take a closer look at a specific example…

A Mexican Boom Chip

I've written before about how Mexico is on its way to replacing China as the premier Pacific Rim global manufacturing platform for selling into North and South American markets.

Why? China’s once huge advantage in labor costs is evaporating…

In 2000, Mexico’s manufacturing wages were 240% higher than in China. Now they’re only 12% higher, and given all the logistical issues and transportation costs that come with shipping parts to China and then bringing the final product back, you can easily see Mexico’s advantage.

About 80% of Mexico’s exports are manufactured goods and trade now represents 60% of GDP – a figure that has more than tripled since 1980. Mexican exports hit a record high in April of this year.

Mexico’s competitive edge is supercharged by a weak peso policy that has pushed the peso down an incredible 1,500% against the dollar since 1987 – though the peso is starting to trend upward.

This is why American, European, Japanese, South Korean and, yes, even Chinese are falling over each other to invest in Mexican production facilities. One example is the recent opening of Italian tire maker Pirelli’s first plant in Mexico.

The Real Key to Mexico’s Growth

Always keep in mind: With Mexico’s geographical edge next to two huge markets and as a Pacific Rim country, it has ready access to all Pacific Rim markets. And take a look at the big picture. While U.S. debt is approaching 90% of GDP, Mexico is at 27%. America’s budget deficit is 8.6% of GDP, while Mexico is at 2.5%.

But the real key is that the Mexican Government sees fostering growth in manufacturing as a top priority to provide employment, political stability, and the carrot to attract significant levels of foreign investment that can supercharge its economy. While the United States is also seeing a revival in manufacturing, it benefits from this shift in Mexico’s favor for strategic reasons.

Late last year, I shared with you my Grupo Simec (AMEX: SIM) boom chip play on this manufacturing trend.

Simec provides the finished steel that goes into manufacturing plants being built hand over fist by global companies taking advantage of Mexico’s edge. In 2011, sales were up 19% and operating income was up 123%. In the first quarter of 2012, Simec posted a 24% increase in net sales and a 145% jump in operating earnings. Sales within Mexico were up 33% as the company exports about half of its production. The stock is trading right around book value, at 75% of sales and at only 3.24 times forward earnings.

So far in 2012, Grupo Simec is up 48.37% while the Emerging Market Index is as flat as a pancake:

SIM vs. EEM YTD 2012

If you blend in some boom chips with your blue-chip stocks, you’ll have the opportunity to take your portfolio to the next level.

Good Investing,


comments powered by Disqus

Two Mexican Manufacturing Plays…

In today’s article, Carl makes the case for Grupo Simec (AMEX: SIM)…

But he’s also been telling me about two other plays in Mexico he really likes to play the current manufacturing boom: Cemex (NYSE: CX) and Empresas ICA (NYSE: ICA).

Not only do these companies present enormous potential because of their position within the Mexican infrastructure build-out – but all three are trading at exceptional value right now. In fact, Cemex and Empresas ICA are both trading well below their respective book values.

First let’s start with Carl’s case for Empresas ICA:

"With a market cap of $1.46 billion, Empresas ICA is set to benefit tremendously as foreign capital enters Mexico's markets over the coming years..."

"That's because, as foreign companies spend billions of dollars expanding their operations in Mexico, they'll be looking for a well-known company to build their facilities."

"And that's where Empresas comes in... this construction company has been a trusted name in Mexico for over 60 years... Today the company is the largest construction company in Mexico."

"And now ICA has more work lined up than it ever has before. In the first quarter of 2011 alone, the company signed deals on 16,428 construction projects. That was an all-time record high."

"But as Empresas confidently states, ‘Our backlog has remained at record levels for more than 3 years."

"And for a company that currently brings in $3 billion a year, that means revenues are set to erupt 733% over the next 2 years."

"You can imagine what that will mean for shareholders…"

And for Cemex:

"Now, with 41 countries flooding nearly $20 billion into Mexico to build and update facilities over the next 12 months alone, the future looks even brighter for Cemex. But there's no denying... The last five years haven't all been good. Cemex nearly floundered after its leveraged 2007 purchase of Australia's Rinker was undermined by the implosion of the U.S. housing market."

"At the time, it was a major hit to the company's bottom line. But now things are looking better... much better... As Mexico-based financial services leader, Actinver, recently told Reuters in an interview, ‘[Cemex] is a big opportunity.'"

For those looking to add some “boom” to their portfolio, all three of these Mexican companies look to be close to their floors in value – with plenty of room to shoot higher.

– Justin Dove with Carl Delfeld

Live Twitter Feed