Stocks to Buy (and Sell) in a Global Slowdown

It’s been a dreadful week for the world’s advanced economies:

  • At the end of last month, the U.K. set the tone by announcing that its economy shrank 0.5% in the third quarter. The contraction suggests the U.K. is in its first recession since the dark days of 1991.
  • Last Thursday, the world’s third largest economy, Germany, released figures showing that GDP had decreased by 0.5% in the third quarter, following a 0.4% decline in the second quarter. That spells recession.
  • Yesterday, we learned that Japan, (still) the world’s second-largest economy, has entered into recession for the first time in seven years. Government officials say the environment could deteriorate further.

One victim of the marked slowdown in world economies is a strategy -- formulated in February 2006 by Goldman Sachs’s Portfolio Strategy group -- of buying shares of U.S. companies that generate a high proportion of their sales internationally.

Goldman’s reversal: Buy U.S.-centric companies
In a research note dated Nov. 5, Goldman Sachs chief sector strategist David Kostin now recommends buying shares of U.S. companies that generate a high percentage of their shares domestically, and reducing exposure (or even shorting) companies with significant non-U.S. sales.

His reasoning? Growth in non-U.S. economies is slowing down faster than in the U.S. The initial strategy of owning U.S. companies with high non-U.S. sales had a terrific winning run, outperforming the S&P 500 by a massive 21 percentage points from February 2006 to mid-2008. However, that has reversed over the last three months, reducing the gap in outperformance to just 3.2 percentage points. Goldman expects the rapid slowdown in non-U.S. economies to continue fueling that reversal.

I like the work of David Kostin and his team -- in fact, I think he’s one of the most interesting strategists on Wall Street. Nevertheless, individual investors should keep in mind that although his research may be reported in broad circulation media, it is meant for institutional investors (and in many cases, hedge funds). These investors are evaluated on a quarterly (and even monthly) basis, so they are naturally concerned about short-term performance.

Look beyond this recession
In his latest report, Kostin is focused on the relative performance of U.S. companies at this specific time in the current business cycle, which is one of his clients’ main preoccupations. However, let’s try a thought experiment; let’s expand our time horizon to include not just the current period, but the following phase of economic growth, the recession that will inevitably follow that, and so on, until we have captured multiple business cycles over a multiyear (multidecade?) time span.

Now, all other things equal, which companies would you give the nod to -- those with low or high international revenue exposure? Once the effects of the business cycle are averaged out, I’d tend to prefer companies that have a larger exposure to the rest of the world (or a growing exposure, at the very least). Why? Because the U.S. economy, on the whole, is shrinking relative to the rest of the world.

In fact, I’d suggest that inasmuch as short-term-oriented investors are taking Kostin’s advice to dump shares of companies with a high exposure to non-U.S. economies, it may allow patient investors to get better prices for their shares. Some of these companies are well-run, successful businesses that have staked a claim in some of the world’s high growth economies, or are preparing to do so.

(In fairness, Kostin prefers to exclude his ‘BRICs Sales basket’ -- a basket of U.S. companies with the largest revenue component from major emerging markets -- from his relative growth trade recommendations.)

Some of the largest, best-run companies in the U.S. already derive over half of their sales from abroad. They include:

Company

Sector

Non-U.S. Revenues as a % of Total Revenues

Intel (Nasdaq: INTC  )

Information Technology

84%

Coca-Cola (NYSE: KO  )

Consumer Staples

67%

Exxon Mobil (NYSE: XOM  )

Energy

69%

Citigroup (NYSE: C  )

Financials

55%

Pfizer (NYSE: PFE  )

Health Care

52%

eBay (Nasdaq: EBAY  )

Information Technology

51%

Amazon.com (NYSE: AMZN  )

Consumer Discretionary

50%

Source: Portfolio Passport: Coming to America, Goldman Sachs, Nov. 5, 2008.

Focus on the bigger picture, and don’t sweat the zags
Here’s the bottom line: Over the next 25 years, the U.S. will necessarily become a smaller part of the global economy than it is today. That is a trend that no investor can afford to ignore, and one that will overwhelm any countervailing zags along the way.

If you’re truly an investor, your time horizon should extend out well beyond this recession, and your focus -- picking up shares of companies with attractive prospects at attractive prices -- should remain unchanged. For many companies, no, make that for the best companies -- U.S. and foreign -- the secular growth trend in non-U.S. economies will play a big part in creating those attractive prospects.

More Foolishness:

For Bill Mann and his team at Motley Fool Global Gains, ignoring international stocks is like going on an Easter egg hunt with one eye closed. To find out his two most recent stock picks, sign up for a free 30-day trial to the service -- there is absolutely no obligation to subscribe.

Alex Dumortier, CFA has no beneficial interest in any of the companies mentioned in this article. Pfizer is a Motley Fool Income Investor recommendation. Pfizer, Coca-Cola, and Intel are Motley Fool Inside Value recommendations. eBay and Amazon.com are Motley Fool Stock Advisor picks. The Fool owns shares of Pfizer and Intel. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | 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 November 18, 2008, at 9:52 PM, FinancialFellow wrote:

    Misery loves company. Is it wrong to take a little comfort that other countries in the West are also suffering a bad economy?

    I think I'm going to have to pick up an index fund (Vanguard probably) sometime 1Q 09 when I'm guessing the market will be at or near bottom. Intersting article on whether or not to add it to a Roth IRA or a Traditional IRA: http://financialfellow.com/2008/11/14/should-you-contribute-...

  • Report this Comment On November 19, 2008, at 12:04 PM, motleynarr wrote:

    Your chart of 7 stocks above has such a muddled description that it is impossible to tell whether you recommend buying or selling the list. Please clarify.

    Thank you

  • Report this Comment On November 19, 2008, at 12:26 PM, TMFAleph1 wrote:

    motleynarr,

    Thanks for your comment. Muddled description? The table contains a set of "some of the largest, best-run companies in the U.S. [that] already derive over half of their sales from abroad" -- as described.

    It is neither a list of 'buy' or 'sell' recommendations.

    Alex Dumortier (XMFMarathonMan)

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