Where Should You Invest? This Indicator Will Tell You.

If you're a global investor, it pays to pay attention to the big picture. Picking where to invest can be just as important as picking what company to invest in.

For example, Specialty Fashion Group is an Australian retailer I respect. It's earning better-than-30% returns on capital, and in better times, it posted steady operating margins and tight cash conversion cycles. Yet the company has not been able to escape Australia's weak consumer environment. The stock has fallen steadily of late, because of slowing sales and contracting margins. (Still, value investors with access to the Australian exchange may want to note that it's now trading for less than three times EBITDA, and paying a 10% dividend yield.)

I highlight SFG here because it's a quirky case. Australia, thanks to rising prices for oil, iron ore, and its other natural resource exports, appears to be doing well, posting 3.3% GDP growth in 2010 atop a surging currency. That strength, however, has come on the back of a mining boom, which has enriched just a tiny percentage of Australia's larger workforce. Strip out mining, and Australia's not doing so hot.

Four out of five economists agree
That somewhat complicated situation could catch individual investors -- those without the research budgets to subscribe to reams of economic data -- by unpleasant surprise. What simple, reliable, and cost-effective resources can everyday investors use to avoid this pitfall?

The Internet offers a tidal wave of free opinions -- but one often gets what one pays for. Depending on what you read and whom you talk to, China alternately is the biggest bubble in history, or not a bubble at all; gold is about to become the world's most reliable currency, or the worst investment ever; and the U.S. is either the safest place to invest in an unstable world, or the reason the world has become so unstable.

No matter how much you read, you may still be unable to answer the simple question: "Where should I invest?"

A simple but effective indicator
Cigarettes are much-maligned for their health hazards. But sales of cigarettes -- an addictive and relatively affordable product -- are a pretty good real-time indicator of who is and who is not feeling financially secure. That's why the earnings report I look forward to each and every quarter comes from Philip Morris International (NYSE: PM  ) . If you read closely, PMI isn't just telling you about itself, but also providing insight into consumer behavior.

Consider, for example, the case of Europe in 2008. Philip Morris began showing evidence of consumer downtrading as early as the third quarter, with operating income growth lagging net revenue growth. That trend turned into harsh reality in Q4, with the company's EU division reporting an 8.6% decline in shipment volume. Consumer downtrading further resulted in a 12.4% year-over-year decline in operating income.

As we all know, Europe has been a horrible consumer market for more than two years now. Watching Philip Morris could have helped you trim your exposure ahead of the rest of the market. As for what's happening now, PMI's most recent results showed some revenue stabilization in Europe, as well as improving margins associated with higher pricing and uptrading in markets such as France and Germany. As you might expect, however, Spain, Greece, Portugal, and the U.K. continue to struggle. Adjust your portfolio accordingly.

A more important trend
The most informative part of PMI's most recent results, however, had nothing to do with Europe, and everything to do with Asia. Revenue (currency neutral) was up almost 28% in the region, and operating income increased almost 50%. This shows that consumers in key Asian markets -- notably Indonesia and Vietnam, according to the company -- are not only accepting higher prices, but trading up to more premium brands. This is clear evidence that this part of the world is starting to feel more financially secure.

But Philip Morris isn't the only multinational with results indicating wealthier Asian consumers. Coca-Cola (NYSE: KO  ) bested expectations in its most recent report, thanks to 21% volume growth in China, and Yum! Brands reported incredible 18% same-store sales growth in the country.

Each one of these companies is recently outperforming, thanks to the market's underestimation of how well emerging-market consumers in Asia are doing.

The global view
Of course, if you read the papers, it's easy to underestimate emerging-market Asian consumers. China's looming banking crisis, the story goes, is about to destabilize that entire hemisphere. But from Philip Morris to Coke to Yum!, consumer numbers for the region tell a different story. That tale could make you a nice investing profit.

Could the tide turn? Of course -- but that's why you should keep a close eye on Philip Morris International's quarterly reports. If demand for premium branded cigarettes in the region begins to decline, you'll know a slowdown is nigh.

Get Tim Hanson's top global stock picks by joining Motley Fool Global Gains. Tim's "Global View" column appears every Thursday on Fool.com.

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International, Coca-Cola, and YUM! Brands. The Motley Fool owns shares of Coca-Cola.The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (61)

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 July 28, 2011, at 5:53 PM, 123spot wrote:

    Great information. Thanks, Tim.

  • Report this Comment On July 28, 2011, at 6:09 PM, gensosad wrote:

    Man, how much money do you want! I am no longer a fool. This is way, way over the line. BUT if it is not, are the "fools" selling there wives and children for "hourly visits?

  • Report this Comment On July 28, 2011, at 6:23 PM, ivanhoe292 wrote:

    Oh-oh. Just when I thought this site would have the most reasonable info....

  • Report this Comment On July 28, 2011, at 6:44 PM, PositiveMojo wrote:

    TIm, if you are saying that cigarette pricing and consumption is a good early indicator of momentum changes at the macro level, then that should be pretty easy to chart from a historical perspective.

    Without the facts to back it up I doubt if it is much better than other commodities such as oil, coal, steel, etc. In fact it would be interesting to see a study that compares it to other commodities.

    Thanks for the article but there needs to be a bit more meat on this proposition.

  • Report this Comment On July 28, 2011, at 8:39 PM, lansdaledon wrote:

    Thank you for your information, how do I get access to Austrailian market?

  • Report this Comment On July 28, 2011, at 8:39 PM, tem01 wrote:

    Never thought of it but it sounds totally rational. What about looking at PM and MO together?

  • Report this Comment On July 29, 2011, at 1:38 AM, mikecart1 wrote:

    This article is pretty bad and I've seen many bad ones in my day.

  • Report this Comment On July 29, 2011, at 2:48 AM, motown92 wrote:

    "Strip out mining, and Australia's not doing so hot." Do you have any data to back up this claim?

    Just curious

    I love PMI

  • Report this Comment On July 29, 2011, at 11:14 AM, bronzeguy wrote:

    I'm sure the thesis is probably fairly correct. I'm much more concerned about what the Fool recommends. Tobacco? (PM, Atria ) What if Childmolesters,inc. stock was going up? .would we get a rec for that?

  • Report this Comment On July 29, 2011, at 11:32 AM, willn329 wrote:

    Why not use other "sin stock" companies? How do alcohol or gaming stocks stand up to this premise?

  • Report this Comment On July 29, 2011, at 4:57 PM, TheoryMeltFool wrote:

    http://my.fool.com/profile/pie77/activity.aspx

    Pie77,

    You've made 20 comments since May, all stating how you think Entropic is going to be best stock pick of the next few years. When you started making that claim, the share price was around $9, and is now trading about 30% less than that.

    Do you have any sources for the info that you're claiming in these posts? If this market has such potential, who's to say Apple or Google won't get in on it too. Do you have any info on Entropic's competitor's?

    Too bad i didn't buy it back on January 30th 2009 and sold it January 9th 2011...

  • Report this Comment On July 29, 2011, at 6:32 PM, hbofbyu wrote:

    Did I just read smokers being compared to child molestors? Woah! Woah, woah...woah... (Lois, this is not my Batman glass).

    Looks like the anti-smoking campaigns are doing more to affect perception than to deter smoking.

  • Report this Comment On July 30, 2011, at 9:26 AM, David369 wrote:

    I've been looking for a good crystal ball and you show me how cigarettes are a fairly good predictor of economic futures. I would have thought it would have gone the other way. Hard times and people would smoke more. I didn't figure that good times and people smoke more expensive stuff. I wonder if the execs at PM know this and are making a killing in various world markets....

  • Report this Comment On July 31, 2011, at 6:48 PM, lowmaple wrote:

    anti smokers: The article does mention cigarettes as an indicator so you can buy other stocks following these companies earnings and wit the money you make you can buy posters etc reminding people of these sin products dangers!!

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