Why I'm Selling U.S. Retailers and Buying Asia

Master international investor Sir John Templeton famously quipped, "See the investment world as an ocean and buy where you get the most value for your money."

With the S&P 500 up nearly 60% from its low and large caps like Starbucks (Nasdaq: SBUX  ) doubling in less than six months, there's not as much value around the U.S. markets these days. Now is a time when it helps to have a global view and look outside the country for better bargains.

The retail industry is a great example. U.S. retailers were cheap earlier this year, but now they more than price in economic recovery. Retailers in Asia, which have better growth prospects and are what I'm looking to add to my portfolio, are actually cheaper. Below is a comparison that highlights what I am seeing.

Metric

American Eagle Outfitters (NYSE: AEO  )

Ryohin Keikaku

Market Cap

$3.5 billion

$1.3 billion

Sales

$2.9 billion

$1.7 billion

PE Ratio

27.7

20.8

EV/EBITDA

8.3

5.6

Dividend Yield

2.3%

2.5%

Data provided by Capital IQ, a division of S&P.

American Eagle shares have more than doubled from their March low, and for the current valuation to make sense, margins have to recover quickly. I'm skeptical that can happen, but American Eagle is hardly alone; Abercrombie & Fitch (NYSE: ANF  ) has more than doubled from its lows, too. Surprisingly, American Eagle and Abercrombie & Fitch shares have made their climb despite falling same-store sales and the bleak outlook for consumer spending -- two headwinds that work against margin expansion.

The comparison company, Ryohin Keikaku, is best known for its Muji line of stores in Japan. It trades under the number 7453 on the Tokyo stock exchange and also has a low-volume pink sheet listing under the ticker RYKKF.PK. Muji's full name translates to "quality, non-brand goods," and that's exactly what the company sells. Everything from apparel to stationery to food is contracted out to manufacturers, wrapped in the same no-frills packaging, and sold in its stores at affordable prices.

Why U.S. retail doesn't deserve a premium valuation
American Eagle isn't the only U.S. retailer with falling same-store sales. The domestic environment is so tough that Target (NYSE: TGT  ) and Costco (Nasdaq: COST  ) , sellers of everyday basics, are posting negative comps as well. The situation will eventually improve, but it's hard to be positive when unemployment looks like it hasn't peaked and banks like JP Morgan (NYSE: JPM  ) are raising interest rates on credit cards. The combination of economic headwinds, less credit, and rich valuations makes it difficult for U.S. retailers to post the double-digit profit growth that's currently priced into many of their share prices.

Asia looks like a much better bet
If you're thinking Japan's economy has been a mess and that there's not much hope for a Japanese retailer either, you're partly right. Its economy is struggling, but Ryohin Keikaku is a product of Japan's bubble bursting -- it is familiar with competing for shoppers in a tough, deflationary environment. This year, it has posted sales gains at home and in the rest of Asia. Plus, like Coach (NYSE: COH  ) , it is targeting China's growing consumer class as an important driver of future growth. Most U.S. retailers simply don't operate in the region and don't have exposure to its rapidly growing economies.

Ryohin Keikaku isn't alone, either. Other Japanese apparel firms are in expansion mode, including Point Inc, which has also done well this year and is putting together its plans for China.

Foolish final thoughts
Sometimes the best investment idea is in our backyard, but at other times it's on the other side of the world and powered by different forces. Right now, the best retail investing ideas I'm finding are outside the U.S., and the bulk of them are in Asia. Underappreciated growth opportunities like Ryohin Keikaku are why we search the globe for the best growth prospects in Global Gains, our international investing service.

Retailers will initially focus on China's developed, coastal cities, where disposable income is highest (and growing). But China has another growth story that benefits other industries in its less developed rural interior. Our team went on a research trip spanning six Chinese cities this summer, and we released a special report with our best ideas for how to capture the opportunity in the fastest-growing part of China. You can get this report with a free 30-day trial of Global Gains. With your trial, you will also get access to our past trip research reports, previous recommendations, and our community of members discussing investment ideas from around the globe.

Nathan Parmelee is co-advisor of Motley Fool Global Gains. He's already working with the rest of the team to plan the next research trip to Asia and looking forward to it. He has reduced his U.S. retail holdings, but still owns shares of Starbucks and Costco -- for now. While staying in compliance with Foolish trading and disclosure policies, he's adding Asian consumer and retail holdings. The Motley Fool owns shares of Costco. Costco is also an Inside Value recommendation.


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  • Report this Comment On September 30, 2009, at 8:37 PM, mberan wrote:

    I wouldn't buy any stock associated with Japan. I'm living here now, temporarily, and see what a mess this economy really is. The new government will make it even worse with the policies that they are talking about. As they continue to not take action on a strengthening yen, they undercut the major companies such as Sony, Toyota, Honda etc. They have a policy of under the highest unemployment rate the country has seen, of increasing the minimum wage. This will further undercut the economy as employers will cut labor. They banking system here is a joke as it does not show it's true books to the outside world. Stay clear of Japan for quite some time.

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