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Stocks to Buy (and Sell) in a Global Slowdown

Alex Dumortier, CFA
November 18, 2008

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:



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

Intel (Nasdaq: INTC  )

Information Technology


Coca-Cola (NYSE: KO  )

Consumer Staples


Exxon Mobil (NYSE: XOM  )



Citigroup (NYSE: C