Can Your Stocks Compete in the Global Market?

How much time do you spend keeping up on the business news coming out of China? If you’re like most American investors, the answer is probably zero.

That is a big mistake, because China has a big impact on a very large number of U.S. companies in two critical ways:

China accounts for a significant amount of its revenues, and  ...

Low-cost Chinese competitors are doing their best to steal their sales.

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 their China strategy.

And if they don’t have a solid one ...

 ...  then it might be time to rethink their place in your trading account!

Can Your Stocks Compete
On the Global Stage?

The U.S. economy is still sick and isn’t going to get better anytime soon. Not with our runaway government spending and reckless deficits, anyway.

The days of looking for domestic growth to increase your domestic-stock returns are long gone. But overseas growth is breathing new life into a surprising number of U.S. stocks — and ensuring that many of these companies don’t stumble if U.S. consumers stop buying.

In other words, American companies looking to grow their businesses had better figure out a way to sell their products in Asia, if they haven’t already. Not just in Asia, but specifically China.

Now, I say this with the caveat that just showing up in China is only half the battle for U.S.-based companies. That’s because plenty of big-name global brands have failed to find their footing there.

It’s not necessarily that the market wasn’t ready for them. Rather, it’s that the companies just weren’t ready to adapt their products, services and/or strategies to the market they wanted to serve.

For their part, many Chinese consumers do want to take advantage of all the latest global trends and be up-to-date on fashion, makeup, technology, food and other things Westerners crave.

However, American companies need to keep looking over their shoulders to make sure Chinese companies aren’t going to steal their business with lower production costs (read: cheap labor) and lower prices.

Plus, every market has a personality and a culture of its own. If a company isn’t doing its level best to understand and adapt to the consumer they want to attract — and to continue doing so even when conditions become challenging — it can ring the death knell for even the most-loved brands.

For example, two U.S. companies just reported their first-quarter profits, and those results were greatly impacted by what happened in China.

YUM! Brands

YUM! Brands (YUM) gets more than 50% of its revenues from outside the U.S., and it is very much betting its future on China, the world’s second-largest economy.

YUM! Brands operates more than 4,200 KFC restaurants and 800 Pizza Huts in China. Plus, it plans on opening 700 new China restaurants this year.

In 2012, 42% of YUM! Brands’ profits came from China alone.

Kentucky Fried Chicken,
China-Style

When you travel the back roads of China like I do, lunchtime 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" label 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.

Until recently, that emphasis on China has paid off big-time. However, it just reported that same-store sales in China fell by 20% in the first quarter.

The company has had problems with a poultry supplier that failed to meet food safety standards as well as fears about chicken over a new strain of bird flu.

Shares are trading around $67.50, not too much changed since the beginning of the year but with a lot of peaks and valleys in between.

RBC Capital recently upped its target for the stock to $75 as the company’s CEO has said the company intends to make a China comeback by 2014.

Apple

It wasn’t that long ago that Apple (AAPL) was the biggest company in the world, as measured by market capitalization. However, Apple’s stock has fallen from $700 to $400 over the last year as its rate of growth slows.

A big part of that slowdown is because of China.

In the first quarter of 2013, China sales dropped off sharply. Sales rose 11% to $8.8 billion, a gigantic drop from the 67% revenue growth that Apple enjoyed in the fourth quarter of 2012.

The problem isn’t that the Chinese economy is struggling. After all, iPad sales grew 138% in China in the past quarter.

The problem is that competitors — Asian electronic giants Samsung (SSNLF on the Over the Counter market) and Lenovo (LNVGY on the Over the Counter market) — are eating away at Apple’s dominance.

Apple has been a tremendous success story, but those Asian competitors are beating Apple at its own game.

In the fourth quarter of 2012, Apple ranked sixth in the China market with a 7.9% market share, while Samsung took first with a 15.4% share and Lenovo second with 13.1% according to IDC.

Beijing-based Lenovo grabbed a 13%
market share over Apple's 8% share in China in Q4.

The overall result was that quarterly revenues dropped by 26% to $337 million, a sharp decrease from the $458 million in the first quarter of last year, and a 41% drop in profits.

Apple says it plans to double the number of retail outlets it has in China, currently at 11, during the next two years.  CEO Tim Cook calls it “a great market.”

There are plenty of rumors swirling about a cheaper iPhone 6 coming to market that could see big success in emerging markets including China.

In the meantime, we’ll see whether Apple or even YUM! Brands can bite back at the big challenges they face in this important market.

2 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, hotel rooms, pollution-control equipment, homes, designer clothes, gambling junkets, solar power panels, and cell phones to name a few.

And if you own stock in a company that is facing meaningful low-cost Asian competition ... the odds are good that they will get their financial butts kicked.

Just ask anybody who used to work in the steel, textile, furniture, or consumer electronics industry.

Best wishes,

Tony

P.S. Speaking of the best way to play the global commodities boom, my friend Sean Brodrick told me that he's planning to send a brand-new gold recommendation to his subscribers TODAY.

Plus, his new video about gold is coming offline tonight at 11:59 p.m. Eastern. Don't miss out — click here NOW to make sure you get all this urgent information before it's too late!


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Posted 05-02-2013 11:05 AM by Tony Sagami
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