After five years of helping Global Gains members beat the global indexes, I'm launching a real-money portfolio on Fool.com today. I'll miss the coziness of the Global Gains community, but I'm looking forward to working in a portfolio setting and the potential for additional feedback from an open forum.
As a tip of the cap to the Dutch and their historical leadership position in global trade and investment, I'm calling this endeavor the Orange portfolio. The Dutch gave the U.S. its first multinational corporation, the first modern stock exchange, and the Dutch auction. Unfortunately, the Dutch also showed the U.S. some of the negatives of capitalism, including "tulip mania," one of the greatest speculative bubbles the world has ever seen.
My hope is to capture many more of the positives of global trade with the Orange portfolio. Since I'm in the U.S. and investing in dollars, I'll also have 30% to 40% of the portfolio in domestically focused companies. Besides, the U.S. remains the largest global market, and to ignore it would be a mistake.
Why it pays to invest globally
Over the next few weeks, I'll discuss how I'll measure my performance, a watchlist of companies I'm considering for investment, and when I'll consider selling. But now let's talk about why it makes sense to invest globally when the U.S. already has a broad global presence, with Coca-Cola
In the past, it made sense to invest globally because there were valuable diversification benefits. When stocks in the U.S. swooned, other markets often didn't. While international investing still has diversification benefits, a December 2010 paper by Bernie Horn shows that over the last couple of decades those benefits have been more prevalent in bull markets, as trade has become increasingly global and repeated financial crises have had global contagion effects.
I think the real value to global investing comes from broadening the potential set of opportunities. For example, if you want to capture the growth of consumer spending in emerging markets, Unilever and Uni-Charm will do a better job than Procter & Gamble
Preventing crime pays
I'm focused on global opportunities in this portfolio, so I think it's fitting to make an Israeli company that gets more than half of its revenue from Latin America the first purchase. Ituran
Growth in recent years has come primarily from Brazil, where the BBC reported in 2008 that a car is stolen every 12 minutes in Rio de Janeiro and Sao Paulo. Ituran has built out a nationwide network in the country and has partnered with insurance companies, which often require vehicle tracking, to grow its customer base. The Brazilian operations could receive a further boost if a regulation requiring vehicle tracking devices in new cars becomes effective in August. Ituran has an agreement in place with GM Brazil to offer its services.
This particular regulation has been delayed multiple times in the last two years, so I'm not counting on anything more than the 4% to 5% subscriber growth Ituran has been able to pick up on its own over the last few years. Fortunately, with the shares trading at just six times operating cash flow, I don't need to.
The clear short-term risk is the slowing Brazilian economy. Consumer credit was blasting Brazil into 2011, when the banks started reigning in consumer lending as the year went on. Banks are now taking their losses, and credit is tighter, which will likely hold back car sales -- and Ituran's near-term growth prospects. I'm willing to tolerate this risk, as well as the ever-present tensions that come with investing in an Israel-based company. What would really trouble me is if the insurance companies Ituran has partnered with in Brazil replaced the company with a competitor.
Drilling for gains
The second company I'm buying is Canada's largest oil and gas driller, Precision Drilling
Drilling is a cyclical industry, and Precision isn't immune to these cycles, but I think the recent selling is overdone, given the company's long-term earning potential. Precision's expertise in horizontal drilling for oil and gas, along with its ability to quickly move and redeploy rigs, bolsters the long-term demand for its rigs and services. Precision isn't the only driller capitalizing on demand for new high-performance rigs capable of horizontal drilling, but it's in a strong enough position that each new rig it builds is locked into a three-year contract that covers the cost of its construction.
Building new rigs requires plenty of capital, and Precision uses its cash flow and debt to finance construction. Precision carries $1.2 billion in debt now, but paying it back shouldn't be a problem, as the first maturity is in 2019, and long-term drilling contracts provide the cash flow needed to make repayments.
The valuation looks attractive, too. Precision's worst cash flow and earnings before interest, taxes, depreciation, and amortization came in 2008 and 2009, at the tail end of the financial crisis. Using those low points and Precision's current market cap and enterprise value, I peg the shares at seven times their price-to-cash-flow and enterprise-value-to-EBITDA multiples. That might not be the cyclical bottom, but it's attractive enough that I'm willing to start building out a position.
Foolish bottom line
The near-term economic outlook isn't doing any favors for Ituran or Precision Drilling, but I think both will remain solid long-term performers in their niches. I'll be buying both now, while broader economic concerns are weighing on the share price, and I'll have more to say next month when they release earnings. Follow my Twitter feed at @GlobalFools to get all the latest on my portfolio and real-time thoughts on global stocks.
