Stock Gumshoe

The folks at Forbes are out with a new investing newsletter, the aptly titled International Stock Advisory by John Christy. Doesn’t have a track record yet, of course, but at least they’re doing a little teasing about their favorite stocks … so the Gumshoe is on the case!

The newsletter will run you about $200 a year, and it comes with a special report (don’t they all?) that will tell you Christy’s “6 Emerging Market Stocks You Must Own Now!”

Unfortunately, they only give us hints for three of them, so I’m afraid the rest must remain mysteries for those unwilling to send a little more of their cash to Steve Forbes. But three I think we can unearth.

“EMERGING MARKET WINNER #1: THE CHINESE PERSONAL COMPUTER BOOM …”

Christy suggests, “why not buy shares of China’s #1 computer maker” … which isn’t too sporting, giving away the answer so easily.

That’s clearly Lenovo. Again, not so sporting because the Gumshoe pooh-poohed Lenovo’s prospects a few months and about 100% ago on the back of a Taipan recommendation. Ooops. They’re listed in Hong Kong, so it’s 0992 if you can trade in HK or LNVGY on the pink sheets for the rest of the hoi polloi.

“EMERGING MARKET WINNER #2: OUTSOURCING TO INDIA …”

OK, so this is another no-brainer big company, I think we’re getting a taste of Christy’s preferences here … has anyone not heard of the Indian outsourcing boom? In fact, we’ve gone so far past the initial boom that now the strong Indian rupee is causing some problems for those who export Indian-accented tech support and credit card telemarketing from India to the US.

Christy’s specific quote is that”This company is a dominant player in India’s outsourcing business – and it’s a cash machine: no debt, a 5-year average return-on-equity of nearly 40%, and EPS growth of 32% a year over the last 5 years.”

So … you probably won’t be surprised to hear this, but with those numbers it pretty much has to be the only Indian company that most Americans had heard of five years ago, Infosys (INFY).

The big outsourcing firm has had troubles with the strong Rupee lately, but growth has still been strong and their last quarter was pretty good (released just a few days ago). Their ROE is a hair under 40% a year over the last several years, and they have indeed grown earnings by about a third each year for ages now … definitely a strong company, and priced as one. Morningstar thinks they’re slightly below their “fair value” right now but not cheap enough to buy, and I see no reason to disagree with them — this is a big company that trades at a premium to its peers, but with pretty good reason. The question is, how much of a premium is too much? India is crazy hot and crazy volatile right now, so tread carefully.

“EMERGING MARKET WINNER #3: CENTRAL ASIAN TELECOM …”

This is a Turkish wireless provider that “has a lock on the local market as well as exposure to rapidly developing nearby markets including Azerbaijan, Moldova, Georgia and the Ukraine.”

John Christy wants to tell you how to get access to these hard-to-invest-in markets through a NYSE-listed company.

And of course, the Gumshoe dearly wants to help. This company is clearly …

Turkcell Iletisim Hizmetleri (TKC)

As the name might imply, this is Turkey’s main cell phone company. And yes, they do indeed have a presence in lots of those other nearby countries. Investing in cellular companies in the developing world has certainly been profitable lately, and this might be another good one if you’re interested in checking it out for yourself.

There is a “but”, though. Actually two “buts.” The first one is geopolitical — for some reason, the shares have been going up up lately as the Iraq/Turkish border heats up over the Kurd issue. I have no idea what’s really going on, or what will happen, but I’m not generally all that thrilled about investing in war zones … so I’d want this one to be pretty cheap.

And the second, and possibly more important “but:” The main reason that these shares don’t trade at a premium, as essentially the only Turkish investment Americans can easily get their hands on.

This is actually a two-parter “but” — the first part is that they’re competing against the prettty aggressive Vodafone, which bought the #2 provider in Turkey a couple years ago, and the second part is that they’ve been chronically undervalued because of a long-time ownership dispute at the company. The competition part might work out OK, they’re holding their own so far, but I’m not at all certain what’s going on with the ownership dispute.

Most recently that dispute has been with Teliasonera, the scandinavian cellular company that has investments across Eurasia. It’s a confusing mess of arguments, and there were at least two major owners, Teliasonera and Cukurova, who were arguing about who had the right to sell their holdings, or to control other aspects of the business. I can’t tell you exactly where this stands now, but if I were to invest I’d certainly want to understand this dispute first because it is clearly the main thing that has held back the shares, which have dramatically underperformed the Turkish market over the last couple years.

On the plus side, beyond their geographic focus in a high growth area, they have a shareholder-friendly dividend policy and pay out at least half of their earnings — more than that lately, about 2%. The bad side of the dividend is that in a business where signficant capital expenditures would seem likely and expansion is part of the investment thesis, they’re paying out 65% of earnings in cash to shareholders instead of reinvesting. I generally like dividends, but a high payout ratio in what is supposed to be a growing business is a little unusual.

So, three companies that are probably worth a look if you’ve not yet dipped your toe in international investing — two expensive blue chips and one maybe, in my book, but you’ll obviously have to make your own call on that. Let us know what you think if you feel like sharing.

This is another relatively quick post for you, since the email wasn’t exactly clue-laden.

This comes in from J. Christof Amberger, of the Taipan newsletters, and it’s a tease for the secret backdoor into Chinese IPO’s.

And more specifically, it’s a tease for a special report about one company that is poised to go public on the Shanghai Exchange in the near future — with an expected blockbuster result.

The central argument, both for the secret backdoor into Chinese IPO investing and for this particular stock, is that the Shanghai market — which is the only market most individual and institutional investors in China can invest in — is going to continue hitting new highs because of the massive amount of money rolling in from Chinese investors.

And that if you can get shares of a company before it goes public in Shanghai, you’ll be on the road to riches.

Hard to argue with that — the government continues to try to rein in the economy, but so far they’re not slowing the markets much.

So this company?

“Not only is this the third-largest producer or personal computers on earth… it jut received permission from the authorities to launch what looks like a hugely profitable IPO on the burgeoning Shanghai Stock Exchange.”

It only takes a few seconds on “liquefy” for the Thinkolator 4000 to spit out the answer:

Lenovo Group (LNVGY.PK for the 20:1 ADR, 0992 in Hong Kong)

So what’s up with that? They said it was an IPO, right? Well, the “secret” here is that for companies that are listed in NY or Hong Kong but not yet listed in Shanghai, a huge boost is expected if and when they do get listed on the mainland Chinese exchanges — especially for familiar local companies like Lenovo. Lenovo’s primary listing is in Hong Kong.

So, this is a big company — it is indeed the third largest computer maker in the world, and it has a lot of business both in China and in the US, thanks to their purchase of IBM’s computer business a while back, but it’s not yet listed on the Shanghai exchange.

And Amberger’s argument is that when it is listed there, the pent up demand for these quality local companies will drive Shanghai prices much higher. Which will mean that the prices you can get in Hong Kong and/or NY should also go higher.

Now, I would be a little hesitant about this — the expected boom in Hong Kong shares as more and more Chinese investors get permission to invest overseas has been talked about quite a bit. And the flip side, that shares that list in Shanghai should climb on demand there, has also gotten a bit of attention.

But none of this is guaranteed — as long as China’s exchange is somewhat of a closed system, there’s no reason to think that a share that’s worth $10 in Shanghai will definitely be worth $10 in NY, since the big investors won’t be able to arbitrage between them. I would hesitate to assume that although investors are willing to pay $8 for a Lenovo ADR now, they’ll be willing to pay $20 for it in January just because domestic Chinese investors can suddenly also buy shares of the same company on a different exchange. It’s not a free and unfettered economy we’re talking about, so it makes perfect sense to me that the same security can be worth very different amounts in two different exchanges– as long as those exchanges are functionally closed to each other.

That’s not to say I’m right — this phenomenon could very well work just as Amberger posits, I just would examine it in your mind and understand why you’re buying the stock. There may be other great reasons to buy Lenovo — compared to the Dell’s and HPs of the world their numbers look pretty good … until you get to earnings, which puts Lenovo at something like a 30 PE. It may be worth it as a China play even without a “Shanghai IPO” boost, given the huge demand I expect we’ll continue to see for computers in China … and the head start that Lenovo has in that market.

So … no idea whether this “secret Chinese IPO” strategy will really work, but Lenovo is definitely the stock they’re touting with this strategy right now. If anyone has looked at these shares, please feel free to share your thoughts.