A Stock Poised for Extraordinary Growth

In my last column, I talked about the unprecedented investment opportunity that exists across Chinese stocks today and about how you, as an American investor, can take advantage of it.

To summarize, you can't rely on index funds, money managers, or even multinationals that have targeted China as the next growth frontier. That's because, as we discovered during our Global Gains research trip to China in June, while big names such as Honeywell (NYSE: HON  ) and General Electric (NYSE: GE  ) will often be awarded high profile work in Tier 1 cities such as Beijing and Shanghai, the real beneficiaries of China's rapid growth are the domestic companies -- such as China Fire & Security (Nasdaq: CFSG  ) and China Security & Surveillance (NYSE: CSR  ) -- that are cleaning up in the faster-growing Tier 2 and 3 cities such as Xi'an and Yichuan.

Now, it can be tough for American investors to get comfortable with these companies because they are so far away. But when it comes to emerging-market growth, the players that are best able to adapt to these nascent markets are the ones that are 100% focused on them. They know their customers better, can react to changes faster, and know what it takes to be successful in "less formal" economies.

Here's another example
Perhaps you've heard of Millicom International Cellular (Nasdaq: MICC  ) . The $8 billion Luxembourg-based company specializes in providing cellular phone service in frontier markets such as Laos, Cambodia, Senegal, Ghana, and Paraguay. In doing so, it competes with entrenched telecommunications giants such as America Movil (NYSE: AMX  ) and France Telecom (NYSE: FTE  ) .

But what sets Millicom apart from its competitors is that by doing business in nothing but frontier markets, it's able to rapidly spread effective best practices. For example, while most telecoms focus on signing long-term usage contracts, subsidizing handsets, and billing by the minute, Millicom's Tigo brand -- thanks to company learning in Latin America -- generally sells nothing but SIM cards, specializes in prepaid service, and offers low denomination top-ups (as little as $0.20) so customers can take advantage of "per second" billing.

All of this is designed to enable the Latin American, African, or Asian consumer who does not have a lot of money to become a loyal customer. And it works. By addressing a previously ignored market segment, Millicom is increasing its subscriber base at a 58% annual rate while earning excellent returns on capital. What's perhaps more exciting is that the company has just begun to crack these markets. Millicom's penetration in Africa -- the fastest-growing market in the world -- checks in at less than 20%.

This, in the words of CEO Marc Beuls at a recent investor presentation, makes Millicom "the best business you can be in in the whole world."

Valuation matters, of course
Even if Millicom is the best business in the world, that fact alone doesn't make it the world's best investment. That can only be the case if investors are sure not to overpay in order to participate in this fascinating story.

And despite the precipitous drop in Millicom's stock price since June, it's not a no-brainer. Remember, though Millicom's service is affordable, the company is still relying on the growth of a spending class in places such as Chad and Congo, alongside stable political regimes in these sometimes very volatile places, in order to realize its extraordinary potential.

In other words, when valuing the stock, investors should employ a larger than normal discount rate before salivating at all of the potential upside. And while I'm still waiting for Millicom to come down a bit in price, the company's experience proves beyond a shadow of a doubt that if you're to succeed in emerging markets, you need to know your customer cold.

If you're looking for more promising emerging markets stock ideas, click here to join our Motley Fool Global Gains international investing service free for 30 days. Our team of analysts travels abroad frequently in order to bring the world's best investment opportunities home to you.

Tim Hanson owns shares of China Fire. China Fire & Security is a Motley Fool Global Gains recommendation. France Telecom is an Income Investor selection. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (48)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2008, at 11:02 AM, LondonStock wrote:

    FOOL,

    in your last advert, you said americal has loads of oil.. in this advert, all of a sudden, oil is scarce..

  • Report this Comment On September 10, 2008, at 11:14 AM, MatthewHSE wrote:

    Why do we have to spend so much time discussing non-American stocks? I really don't care if I could make more money investing in Chinese or other foreign companies, because on principle, I refuse to invest in anything but American companies. I can't imagine that I'm the only one who believes it's best to keep American money in America, so it would be really nice to get more articles about American stocks.

  • Report this Comment On September 10, 2008, at 12:35 PM, TMFMmbop wrote:

    I really don't care if I could make more money investing in Chinese or other foreign companies, because on principle, I refuse to invest in anything but American companies

    ---

    That's sort of a bizarre principle to hold given globalization. I'm sure many of the American companies you hold are doing business abroad, and many foreign companies create jobs/do business here in America. Moreover, many foreign countries have superior growth opportunities to the US and offer important diversification for your portfolio. I encourage you to rethink your position on this matter.

    I can't imagine that I'm the only one who believes it's best to keep American money in America, so it would be really nice to get more articles about American stocks.

    ---

    Most American investors are drastically underexposed to foreign equities. In fact, Citigroup recently recommended that foreign stocks make up as much as 55% of your portfolio. You stand to fight some serious headwinds if you ignore that advice.

    Tim

  • Report this Comment On September 12, 2008, at 11:14 AM, mudman90039 wrote:

    My Schwab account says I should be 50% in Big US corporations, but I had a great run with more in European and foreign stocks till just a month ago when they settled down one more step.

    I'm a believer that we're tied in this together, I'll still keep my global perspective. When the turn around happens it may be in emerging markets that bolster US companies.

    glenn

  • Report this Comment On September 12, 2008, at 1:16 PM, gmogros wrote:

    As usual, a very promising headline with nothing in really. Should we buy MICC?

    Shouldn't we?

    I wish there was a way I could unsubscribe from this ads which always make me angry.

    TMF, please delete me from this. Unfortunatly I still have subscription for some pay service which was another mistake I made.

  • Report this Comment On September 12, 2008, at 2:03 PM, JesterWOCourt wrote:

    gmogros, I'd say if MICC were in general "a buy" it'd at least be a formal rec for one of the newsletters. Besides, how can they tell what you have in your portfolio? I'm sure it's a buy for someone - but not in their portfolios.

  • Report this Comment On September 12, 2008, at 8:36 PM, seniorbuyer wrote:

    What is the stock I'm supposed to buy?????

  • Report this Comment On September 23, 2008, at 7:31 PM, bodfishmike wrote:

    China stocks? And you thought WE had a free market?

    he, he..

  • Report this Comment On October 24, 2008, at 9:44 PM, JFrazer1 wrote:

    I see it as my patriotic duty to own the most profitable foreign companies. Then as they profit I will profit as well, returning the balance of purchasing power in favor of Americans such as myself.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 723562, ~/Articles/ArticleHandler.aspx, 11/23/2014 3:15:25 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement