Jubaks on MSN-The 50 Best Stocks in the
World
To build a portfolio for the long haul, focus
on traits that give stocks extended shelf life
-- global reach, competitive advantage, an
indestructible brand name. Here are my
favorites.
By Jim Jubak
In my last column I argued that economic
trends are dividing the big international
consumer-goods companies into two
groups. Those like Coca-Cola (KO) and
Gillette (G) have the clout to control their
markets. A second tier of companies,
however, is at the mercy of retailers and
distributors -- even though they own
recognizable brand names. In the future, I
said, the rich would get richer -- in the form
of bigger profit margins -- and the also-rans
would get squeezed. You don't have to be a
rocket scientist to figure out what group of
companies to invest in.
The more I think about that analysis, the
more it makes sense to me to extend it to the
rest of the world economy. The increasingly
global market for computers, insurance,
pharmaceuticals, cement and automobiles, to
take just a few examples, gives a big edge to
companies that have invested in creating
global brand names, global distribution
networks, world-class manufacturing
systems, or industry-leading technology.
Companies with one or more of those
competitive advantages should reap extra
profits as they expand into newly opened
markets and bury inefficient competitors. A
portfolio of these global winners should,
over the long haul, earn better-than-market
returns with below-market risk -- my favorite
combination.
Here's my cut at putting together such a
portfolio. Call it the "50 Best Stocks in the
World." (I delivered a version of this article
in a workshop by that name at the Seattle
Money Show two days ago.) I'm sure you'll
disagree with at least some of the picks.
You'll probably have your own candidates
for the list -- and be outraged that I left a
favorite off. Let the debate begin!
But first, let's set some ground rules. These
50 stocks aren't those that I'd buy today for
the greatest return over the next year. You
can certainly find rockets that will
outperform most of these companies over
that time period. By their nature these are
big, relatively mature companies -- you won't
find many growing at 25% a year on this list.
Instead, think of this as a list of global blue
chips -- stocks that you can buy and put
away for 10 years with faith that when you
look at them again at the end of a decade,
they will still be in business and will have
outperformed the market averages.
A hot product isn't the ticket to membership
in this club either. Instead, I've looked for
companies with a sustainable global
competitive advantage. The kind of
advantage that I've looked for varies by
industry. In consumer goods it can be a
recognized brand name, backed up by an
efficient distribution system. That adds up to
the kind of market share that can keep
competitors almost indefinitely at bay.
Kellogg (K), for example, controls about 55%
of the European market for ready-to-eat
cereal, according to Morgan Stanley, as well
as 58% of the Asia/Pacific market and 74% of
the Latin American market. At Intel (INTC),
on the other hand, competitive advantage is
the result of years of research and
development that have produced a
measurable technology gap between the
company and its competitors. At Wal-Mart
(WMT), the company's edge comes from
years spent developing systems for
delivering goods, controlling inventory, and
squeezing the last penny out of margins. In
each case, I've looked for advantages that
have taken years of time and billions in
investment to create. These 50 companies
will collect rent on that investment for years
to come.
(Credit where credit is due: My starting point
for my search was a great Morgan Stanley
research report, called "Global Investing:
The Competitive Edge," that combed the
global economy looking for companies with
competitive advantage. But I'm to blame for
the contents of this portfolio. After adding
my own analysis, I produced a list that
differs in significant ways from Morgan
Stanley's own conclusions.)
Okay, now onto the list itself.
I divide these 50 into four groups:
1.The usual suspects. Come on, are
you really surprised to see American
International Group (AIG), Applied
Materials (AMAT) , Avon (AVP),
Boeing (BA), British Airways (BAB),
British Petroleum (BP), Cisco (CSCO),
Coca-Cola, Compaq (CPQ), Disney
(DIS), Federal Express (FDX), General
Electric (GE), Gillette,
Hewlett-Packard (HWP), Honda
(HMC), Intel, Johnson & Johnson
(JNJ), Kellogg, Mattel (MAT),
Microsoft (MSFT), Nike (NKE),
Oracle (ORCL), Pfizer (PFE), Philip
Morris (MO), Procter & Gamble (PG),
Sony (SNE), Toyota (TOYOY) and
Wal-Mart on this list? Even if you
don't follow each company's
industry, you still know that these
are the stars of the global economy.
No car company, for example, can
match Toyota's manufacturing
efficiency and its penetration of the
entire globe's auto markets.
(Although Honda gives the company
a run for its money.)
2.The undeservedly obscure. If they
didn't operate in unfamiliar industries
or from unfamiliar parts of the world
(to U.S. investors, that is), these
companies would easily fall into the
first group. Two European
companies, Holderbank (HFGCY) and
Lafarge (LFGEY), rank No.1 and No. 2
in the U.S. cement market. Auto-seat
and interior maker Lear (LEA) is
using its manufacturing efficiencies
to grab share in the rapidly growing
auto-parts market, where more and
more auto builders buy components
from outside suppliers that they once
built themselves. Monsanto (MTC)
controls a portfolio of patents that
give it a commanding lead in the
production of genetically-engineered
seed. Nucor (NUE) and Pohang Iron
& Steel (PKX) are the most efficient
steel makers in their home markets,
and are increasingly looking
overseas for new markets. Other
companies I'd put in this group are
Asia Pulp & Paper (PAP), Caterpillar
(CAT), News Corp. (NWS), Reuters
(RTRSY), Samsung (SMSUF) and
Unilever (UL).
3.The up-and-comers. These
companies have built important
competitive advantages, but have
just begun to apply it. Home Depot
(HD), for example, has learned how to
dominate the home-improvement
market in the U.S. and is just now
taking that expertise overseas.
WorldCom (WCOM), with or without
MCI (MCIC), now owns critical parts
of the Internet infrastructure that
give the company the lead in the
global race to integrate voice and
data networks. Other companies in
this category are Citibank (CCI),
Enron (ENE), Sealed Air (SEE), and
The Gap (GPS).
4.The temporarily out of favor. The
kind of competitive global advantage
I'm talking about here doesn't
disappear overnight. From previous
columns you know that I'm not --
how shall I put it? -- overly fond of
McDonald's (MCD) and Time Warner
(TWX). But these companies control
globally-known brand names to
which better management will
someday return their old luster. Glaxo
Wellcome (GLX) is facing
product-transition problems with
Zantac, but it owns impressive
expertise in developing and
marketing drugs. Toys 'R' Us (TOY)
probably doesn't get as much credit
for its international prospects as it
should because of trouble with its
U.S. operation.
Scanning through the list of 50, certain
themes jump out at me. For example, U.S.
companies dominate the portfolio. Partly,
that's a result of an emphasis at U.S. firms on
building global brand names. Partly, I think
it's because the U.S. domestic market is the
most competitive in the world, and that gives
U.S. firms a big head start as the
international economy becomes increasingly
competitive in industry after industry.
More companies make the list because of
their competitive advantage in distribution
than because of an edge in technology.
Avon is a master at direct marketing.
Caterpillar's strength is an incredibly loyal
and widespread distribution network. The
Gap, Home Depot, Toys 'R' Us and
Wal-Mart all earn their place because they've
pioneered new ways to sell. Such drug
companies as Pfizer and Glaxo are on this list
because of the efficient structure they've
built up for guiding a promising drug from
trials to patients. With the big players in the
pharmaceutical industry likely to buy as
many or more drugs from biotech startups as
they invent in-house, distribution is
probably more important in this industry
than research-and-development budgets.
I'm only actively
buying one stock on
this list right now --
Sealed Air.
Snapshot
Price History
Overview
Earnings Estimates
I wouldn't rush right out and buy the stocks
in this portfolio. Most are currently fully or
even over-priced. Instead I suggest that you
use it, as I've used a list like this for the last
few years, to guide a very long-term buying
strategy. These blue chips have exactly the
combination of above-steady-market return
and lower-than-market risk that I'd love in a
portfolio at my retirement about 20 years
from now. With, I hope, a decade or two of
travel and puttering to finance at that point, I
certainly don't intend to put my nest egg in
bonds. Instead, I'd like to be checking on the
progress of Intel and Sealed Air and
Johnson & Johnson.
So I'm in no hurry to buy, and I can wait for
the dips that even stocks like these suffer. I
picked up shares in Hewlett-Packard last
year when the company's earnings
disappointed short-term investors. I bought
Home Depot this year when the analysts on
Wall Street started to dither that a company
with almost no international presence had
run out of growth opportunities. I own
shares in Intel, Reuters and Cisco, all picked
up when those stocks looked weak. And I
add to these positions when the opportunity
offers.
I'm only actively buying one stock on this
list right now. Sealed Air's acquisition of the
packaging business of W.R. Grace makes
this stock extremely attractive. The argument
is very straightforward: Give Sealed Air's
superb management -- the company has
been able to wring a 9.3% net profit out of
sales -- an additional $2.5 billion in sales to
work with and watch the earnings fly. Not
only should Sealed Air get more profit out of
Grace's operations than Grace could, but the
new business speeds the company's entry
into overseas markets -- and also gives
Sealed Air a dominant position in the
food-packaging industry. And that's likely to
be a big growth business as consumers from
Rio to Bombay buy more packaged
foodstuffs. I bought my first shares at $52
about a month ago. The stock is slightly
more expensive now, but still reasonably
priced, given the company's growth
prospects.
I might sell in about 40 years or so.
New Developments on Past Columns:
Companies on the Couch
The fix is taking longer than expected at
Informix (IFMXE), a stock that I first wrote
about in my Aug. 5 column, "Companies on
the Couch", and then recommended for
purchase in the update to my Aug. 12
column, "It's a Wireless World." At the end
of September, the company announced that
it needs until November to complete its audit
and restatement of 1996 revenue. Even more
daunting, the company also said for the first
time that the restatement would include 1995
revenue. Because of Informix's delay in filing
its second-quarter financials, the Nasdaq has
initiated delisting procedures on the stock.
There's no doubt that these developments
are serious. A restatement that was expected
to require adjustments in the range of $70
million to $100 million is now likely to reach
$200 million in revenue. However, I don't
expect the company to be delisted by
Nasdaq and I think that most Informix
customers are sitting tight. Fixing the mess at
Informix will clearly take longer than I
thought and the restatement will certainly be
shockingly large, but I still think the
company is a good turnaround play. |
