You Need To Consider China-Focused ETFs & Stocks For Your Portfolio (FXI, GXC, SBUX, BSX, AAPL, CHL)
Tony Sagami: We are thick in the middle of quarterly earnings season, and even though all we typically read and hear about are U.S. companies, the long arm of China is having huge impacts on many of them.
I’ve said it many times before in this column, but you should look at every stock in your portfolio and ask two crucial questions:
1. Has my company taken solid, effective steps to make China a significant part of its future growth strategy?
2. Is my company’s main business competition coming from low-cost China rivals?
Any U.S. company that hasn’t made China an important part of its growth plans is going to get left in the dust. Heaven help any U.S. company that thinks it can compete against Chinese companies with dirt-cheap wages.
Here are just a few examples of companies that ‘get it’ and recently reported their second quarter results, which were substantially boosted by doing big business in China.
- Starbucks (NASDAQ:SBUX) reported a very respectable 34% increase in Q2 profits. Starbucks has 17,000 coffee shops around the world with 10,900 of them in United States. The company, however, knows its future growth is going to come from outside the United States, especially Asia. The company plans to more than triple its store count in China to 1,500 by 2015.
- Boston Scientific (NYSE:BSX) reported a 67% jump in quarterly profits, but the biggest news was the announcement that it will hire 1,000 workers and build a $150 million factory in China.
- Apple’s (NASDAQ:AAPL) iPhone is almost as much of a piece of jewelry in Asia as it is a communication device. Apple’s revenues surged by 82% in the second quarter, but sales in China increased by an astounding 600%!
- Yum! Brands (NYSE:YUM) delivered better-than-expected profits thanks to China. Same-store sales for Chinese Pizza Huts and KFCs increased by 22% and 17% respectively while same-store sales in the United States DECREASED by 4%.
- Not wanting to get left in the Chinese dust by Yum! Brands, McDonald’s (NYSE:MCD) announced that it is going to build one new McDonald’s restaurant EVERY DAY for the next four years. Here is one statistic that tells me volumes: 75% of all the McDonald’s in the world are owned by franchisees, but only 6 out of the 1,300 McDonald’s restaurants in China are franchised. McDonald’s is so convinced of China’s potential that it is not giving up those stores.
- Volkswagen (OTC:VLKAY.PK) made an amazing $6.9 BILLION of profits last quarter largely because of a 21% increase in sales in China.
- Vale SA (NYSE:VALE), the world’s largest producer and exporter of iron ore and iron pellets, reported RECORD sales in the second quarter on booming demand from China. China is Vale’s largest customer, with 41.9% of the company’s iron-ore and pellet production.
I could tick off another couple dozen examples, but I think you get the point. Show me a company that is rapidly growing its profits, and I will show you a company that has made Asia in general and China in particular a crucial part of its future plans.
Just take a look at these two pie charts about Caterpillar, which show the crux of the story with one glance.
Second quarter profits at Caterpillar rose by 44% thanks to booming business in Asia. These two pie charts tell you all you need to know about how important Asia is to any western business.
Source: The Motley Fool
Source: The Motley Fool
As you can see, Caterpillar received 9% of its total sales from Asia and 53% from North America in 2006. Those numbers drastically changed to 24% from Asia and 38% from North America in 2010.
That is just over the previous four years. Imagine how that sales mix will change in another 10 or 20 years.
Clearly, China and its Asian neighbors are having a big impact on many U.S. companies, and you better make sure that your portfolio is filled with companies that “get it.”
By doing so, you can put a lot of ‘China’ in your portfolio without directly investing in Chinese stocks.
I talk to investors every day. It still surprises me how reluctant U.S. investors are to invest in foreign stocks. I think that is silly because there are more than 100 Chinese companies traded on the NSYE and Nasdaq such as China Mobile (NYSE:CHL) and China National Offshore Oil Corporation (NYSE:CEO).
Just about every brokerage firm — full service as well as discount broker — have a foreign trading department that makes it as easy to buy stocks on the Hong Kong stock exchange as the New York Stock Exchange.
If you remain skeptical, you can always add some broad exposure to the booming Chinese economy with exchange traded funds.
Here are four China-focused ETFs to consider:
iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) owns the 25 largest and most-liquid Chinese companies, so think of this as investing in the Dow Jones 30 Industrials of China. The top 10 holdings make up more than 60% of the fund, so you will be heavily weighted with China Mobile, China Construction Bank, Industrial and Commercial Bank of China, China Life Insurance, and Bank of China.
SPDR S&P China (NYSE:GXC) is managed by State Street and is also a large-cap fund with emphasis on financials as well.
PowerShares Golden Dragon Halter USX China (NYSE:PGJ) isn’t as heavily weighted toward large-cap financials. It owns a lot of energy (21%), technology (18%), and telecommunications (16%).
Claymore/AlphaShares China All Cap (NYSE:YAO) focuses on small caps.
As always, you need to do your homework and decide whether any of these securities are appropriate for your personal situation and financial goals. And as you know, timing is everything when it comes to investing, so you should wait for these to go on sale before jumping in or wait for my buy signal in Asia Stock Alert.
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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