Can You Grab This Tiger’s Tail?

| February 11, 2010

Did you know China’s economy grew during the fourth quarter at a rate of 10.7%?  And, India’s anticipating a growth rate of over 7.2% this year.  Unless you’re from Mars, you’ve no doubt heard these numbers tossed about by the mainstream media.

What the talking heads on TV don’t tell you is how to make money with this information.

I’ve got a great money making idea… but first why is economic growth so important?

Most professional investors fall into one of two categories – Value or Growth.

Yes, I realize there are other categories out there but let’s keep this simple.  Value and Growth investors both look at the same universe of companies… but they see very different investments.  Value investors often focus on what a company’s worth, while Growth investors focus on… well, growth.

Value investors are the trash pickers of society.

Famed investor Benjamin Graham – who mentored a very young Warren Buffett – likened value investing to picking up discarded cigarette butts that might have a drag or two left in them.  I guess that was before we knew just how bad cigarettes are for your health.

Value investors dig through financial statements of downtrodden companies.  They analyze hundreds of companies at a time looking for one that doesn’t belong in the trash heap.  The proverbial baby thrown out with the bathwater.

Value investors focus on assets, book value, and earnings multiples.  They want to know they’re buying something with the potential to recover in value.  And, they believe investing this way significantly limits downside risk.

A recovery can take months and even years, but when it happens, the gains can be huge.

The Growth investor’s cut from a different cloth.

They don’t care much for valuation… well, maybe a little… but their valuation parameters are very lax.  Asset values don’t matter, company valuations aren’t important, and valuation ratios are thrown out the window.

The average price/earnings (P/E) ratio is around 20x.  Growth investors don’t mind buying companies with P/E ratios of 40x, 60x, or even 80x as long as the growth rates are high.  They know the company will grow into (and well beyond) current valuations.

A Growth investor is focused on how big a company can get and how quickly they can get there.

One big growth area right now is technology.  Companies are spending billions moving to advanced technologies that make them more efficient and more profitable.  The growth in tech spending seems to be moving constantly higher.

If you want proof, just look at Google (GOOG)!

Many investors wish they “bet the ranch” on Google stock at its IPO.  You could have bought all the shares you wanted for less than $100 each.  At its peak, Google traded for almost $725 a share…

That’s a gain of more than 625% in just a few years.

And all those gains are due to one thing… the company’s skyrocketing earnings growth.

If you like investing for growth, let’s think outside the box.  Instead of focusing on a specific industry (like technology), let’s focus on a quickly growing country or two.

The US economy grows around 2% a year… nothing to write home about.  On the other hand, China is growing at more than 10% and India’s growing north of 7%.  These are two great places to start. Now within these rapidly growing economies, there are hundreds of companies to focus on.  But let’s keep it simple.

Everyone needs to eat… and as economic prosperity touches more people, they’re going to eat out more frequently.  A better diet is one thing many emerging middle class people spend their new bankroll on.

So let’s take a look at some restaurants.

One of the fastest growing restaurant chains in both China and India is – believe it or not – KFC.

Yum Brands (YUM) owns the KFC, Pizza Hut, and Taco Bell brands.  While you might see these restaurants everywhere in the US, the expansion is just beginning in China and India.

Yum is focusing on overseas expansion… and what better economies to expand into than fast growing China and India.

The company estimates opening more than 1,000 new stores in India by 2015.  These stores could generate more than $1.0 billion in sales.  Yum already has 3,500 restaurants in China producing just over 30% of the company’s operating revenue.

Clearly their growth is exciting.

But that’s not all.  Yum is targeting their product offerings directly at the younger consumer.  By establishing brand recognition early, they’re creating a long term customer who will be loyal for years!

Don’t worry about the growth rate slowing.  Keep in mind, McDonalds has more than 3 times the number of stores globally.  Between the two, Yum is my choice.  I see years of steady growth ahead.  And a growing company always leads to a growing stock price.

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Category: Foreign Markets

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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