More Gains from the “Gilded Class” — New Frontier Trader

By Travis Johnson, Stock Gumshoe, April 28, 2009

We started looking at this ad for Alexander Green’s New Frontier Trader yesterday, sniffing out that the Latin American telecom poised for huge gains was America Movil … now, to take a gander at the other two.

The big spiel here is essentially an argument for foreign investing, though more specifically the claim is that the “new gilded class” will be pumping $50.7 billion into these companies by April 29.

I won’t argue about the numbers or dates — America Movil is on the verge of reporting their results today, April 28, and we can see then if they’re looking great for the near future … but all three of these companies are huge, multinational firms that probably represent a bit less risk than some of the wild flyers we talk about in this space from time to time.

But what the “gilded class” stuff is about is just … the middle class. The argument is that the new consumer middle class that’s emerging throughout the developing world will be the real engine of growth, pouring money into the companies that provide the goods and services they need. If you’d like the general overview of this “emerging middle class” argument, one of the articles they quote is from the economist, you could do worse than a quick read of that article here.

So if this new “gilded class” is going to make us rich, let’s find out how, shall we? We looked at the first teaser for America Movil already, and now we’ll take a look at the second and third.

“Frontier Play #2: Asia’s Electronics Boom

“Expected Gain: 439%

“Consumer demand for new electronics is soaring in frontier economies throughout Asia. Companies like Samsung, Sony, and Panasonic are rapidly opening new factories in places like Vietnam and Malaysia.

“But they have a problem… and it’s costing them a lot of money.

“The electronics they produce require top grade galvanized steel. And the frontier economies they’re expanding into just don’t have it. They’re wasting billions importing quality steel.

“Enter our second Frontier Play. This Asian steel producer, renowned for its high quality steel, just acquired the only company in Malaysia currently producing galvanized steel sheet. They now control 100% of the local supply to the big electronics firms in Malaysia.

“Vietnam is their next target. They’re planning a huge $1 billion steel mill. Once completed, they will be the largest steel producer in the country.

“So how are they keeping the rest of the competition out?

“For one, their operating costs are 20% lower than the rest of the industry. Second, they have $15 billion in cash earmarked for expansion. And finally, they’re turning a huge profit – $4.6 billion in 2008.
With the rest of the competition playing catch up, expect this company to generate even bigger profits in the coming years.”

It doesn’t sound like it from that “electronics boom” header, but this teaser is for …

Posco (PKX), Warren Buffett’s favorite South Korean steel company.

Posco is one of the four or five largest steel companies (by production volume) in the world (Arcelor Mittal is far and away the largest, and a couple of the Japanese firms are a little bit bigger than Posco — this is overwhelmingly an Asian industry, US Steel is the top American producer and it just barely cracks the top ten. This is a long-time value investor favorite, it’s been touted by the Motley Fool several times, Warren Buffett has steadily increased his holdings, and Martin Whitman at Third Avenue has been adding more Posco shares, too.

And Posco did buy the only sheet galvanized steel maker in Malaysia (MEGS — now Posco Malaysia), and that is a high demand market for this fancier sheet steel, there’s a quick article about their initial operations and expansion here.

But it’s hard to imagine that this will determine the value of Posco going forward — I really like this company, and I owned shares a few years ago (sold way too early, of course), but they’re probably going to rise and fall on heavy industry demand in South Korea, which may be a bit more uncertain right now even than demand for fingerprint-resistant DVD player consoles in Malaysia. If you think the economy is going to turn around that will be great for Korean heavy industry, shipbuilding, automobiles, etc., which would mean lots more demand in their home market — if you think exports from Korea will shrink for a few years, you’ll probably see a better price on Posco shares in the future (though I don’t know if it will get back down to the panic price of $42 that we saw last Fall — if I had been watching it at the time I might have bought back when I saw it dip under $50).

Credit Suisse upgraded the steel industry a week or two ago based on Chinese demand\, and noted that they favor the “cheap” steel stocks like ArcelorMittal, Nucor, and Posco. On the other hand, there was a good article in the Financial Times this morning about projected steel demand dropping more than at any time since the end of World War Two … and Posco’s first quarter report, issued a couple weeks ago, was full of cost cutting, production cuts, and weak sales numbers. Is this the right price for Posco? Your call, let us know what you think.

And one more for our Frontier Trader teaser-a-thon …

“Frontier Play #3: Oil Independence in South America
“Expected Gain: 962%

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“One South American country recently went completely oil independent. Quite an accomplishment considering they were importing 85% of their oil in the 1970s.

“And as usual with frontier