Going around the world for growth stocks
This U.S. advisory tells the story of two big growth stocks in a journey that leads to China, Rio de Janeiro, Sudbury, Ontario and Jerusalem.
Globalization is not dead.
It may have been feeling poorly over the past year or so (and at least one prominent economist, Mr. Jeffrey Rubin, believes rising oil prices will stifle its recovery.)
Still, you won’t find many analysts giving up on world trade. And in almost every story on that trade, you will find China.
That’s where The Complete Investor begins this story. This U.S. advisory is adding a very large mining stock to its Growth Portfolio. It is also reviewing another stock in the portfolio, the world’s largest maker of generic drugs.
On the face of it, the two have nothing in common (unless mining stories give you headaches). But they re-affirm the advisory’s conviction that the road to growth leads through global investments.
Its Growth Portfolio groups stocks from several nations, including two from Canada, we note in passing — Agnico-Eagle Mines (TSX/NYSE-AEM) and Potash Corp. of Saskatchewan (TSX-NYSE-POT). Both of these, of course, rely heavily on international markets.
But let’s begin at the beginning, with iron ore shipments to China.
Well known in Sudbury
“Once again, when it comes to understanding the importance of a commodity such as iron ore, the tale starts with China,” says Mr. David Sandell, writing for the advisory.
China just can’t stop growing, it seems. Its annual growth rate is once again approaching double digits. And the government keeps egging it on, giving consumers incentives to buy cars, and investing in infrastructure.
All this requires steel, which in turn requires iron ore. The biggest beneficiary of this is the biggest iron ore producer in the world — Brazil’s Vale SA (NYSE-VALE).
The name is certainly well known in Sudbury, Ontario and other locales in which Vale Inco has operated since the Brazilian firm took over Canada’s giant nickel producer in 2006.
It’s not without controversy, either, as a bitter strike and pollution issues have brought Vale Inco unwelcome headlines of late.
But our story leads us back to China’s thirst for iron ore.
A real inflation hedge
After inventories of iron ore were drawn down in 2008, imports have been climbing to record levels — in July, China imported 58 million tons.
Generally, iron ore prices are negotiated between big buyers and the leading producers, like Vale. In the past year, with a weak global economy, buyers looked for discounts. Korea, Taiwan, Japan and Europe all won concessions.
But China refused to go along, leaving it exposed to spot prices. Iron ore rose to $111 a ton in August in China. “We expect prices for iron ore and other raw materials to move higher as the developing world continues to demand ever more raw material and as the developed world’s economies improve.”
That alone would seem to justify an investment in Vale SA. But there’s another reason, Mr. Sandell adds. It’s a good inflation hedge.
The Brazilian real has some festive days ahead of it. “Latin America’s largest nation is slated to see its currency gain strength compared to the dollar and most other currencies.” Indeed, investing in commodities (be they Brazilian, Canadian or Australian) could be seen as an inflation hedge.
The shares of Vale are trading at roughly half the level of their all-time high, and they have been moving up, sitting today at $26.75.
From Rio, Mr. Sandell takes us to “an entirely different front,” the health care debate raging in the U.S. However, we go not to Washington, but to Jerusalem.
Close to surefire
The author tells his U.S. readers that whatever health care plan emerges, the best health care stocks should prosper “because they’re leveraged to demographic realities, and in particular to the tide of aging baby boomers, who are spending increasing amounts of money on prescription drugs.”
And of course Canadian investors have even less need to ponder America’s eventual health care legislation, especially when the stock in question is headquartered in Israel.
Teva Pharmaceutical (NASDQ-TEVA) makes more generic drugs than anyone else in the world. The advantages of this are plentiful.
For one thing, these cheaper drugs naturally benefit from a downturn in the economy. The demand doesn’t really shift much with the economy, either (if you need them, you need them). And a growing number of brand name medications are losing their patents.
Put all this together, says Mr. Sandell, and Teva is on track for earnings growth of close to 20 per cent a year. In the second quarter alone, Teva’s new generic version of the hyperactivity drug Adderall helped revenues grow by 20 per cent, to $3.4 billion.
Plus, Teva’s acquisition of Barr Pharmaceuticals is now expected to save the company $500 million next year, instead of the $300 million originally estimated.
In a sector full of questions marks, says the author, Teva and its generic drugs “are as close to a surefire winner as you can get.” Trading at about 13 times expected 2010 earnings the shares are a bargain, he adds. The price today is $50.94.
It’s almost a cliché that transportation and trade are making the world smaller these days. But as far as this advisory is concerned, that just makes it easier to make the profits in your portfolio bigger.
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