Worried about whether the bull market will continue or crash and burn? You’re not alone. The constant uncertainty since the financial crisis has fueled a focus on low-risk investments like bonds and utility stocks over the last few years.
Even the consumer staples sector is seeing headwinds. But there’s one particular segment of the staples business that I think holds big promise, and that’s consumer stocks serving emerging markets.
Growth, Not Just Stability: The attractiveness of domestic consumer staples stocks like Kraft (NASDAQ:KRFT) and General Mills (NYSE:GIS) comes from the stability and dividends. But it’s hard to imagine sales of Mac & Cheese or Cheerios doubling in the next year or two because these brands have reached critical mass. Not so with staples in emerging markets, where a booming middle class is developing more expensive tastes for food and drink.
Currency Wars: Increasingly, the developed world is facing weaker currencies. That could either be by design like Japan’s plan to jump-start its economy by loose monetary policy, or by hangover from political and financial disaster as we’ve seen in the European Union. Any way you slice it, weakening currencies in developed markets should help to strengthen currencies in emerging markets … and in turn, that’ll give your dollar-denominated investments in those markets a boost.
It’s Time to Rotate: Investors might not be 100% happy with things, but by and large it appears the appetite for risk is growing. The S&P 500 is back to 2007 levels, the “great rotation” out of bonds and into stocks continues to grab headlines and emerging markets are starting to return to favor now that China appears to have some of its swagger back. I remain conflicted on whether we are in the middle of a secular bull market, but this much is true: The played-out strategies of 2009 and 2010 are not going to work much longer. It’s time to start thinking strategically about allocation.
So how can you play emerging market staples? The simplest way is through an ETF like the SPDR S&P International Consumer Staples Sector ETF (NYSE:IPS). Its top holdings include multinational stocks with inroads into Latin America and China, including foods giant Nestle (PINK:NSRGY), which is a big player in Latin America and China, and alcoholic beverage company Diageo (NYSE:DEO), which is seeing a booming business in emerging markets, particularly for western whisky and scotch brands.
If you want to pick individual stocks, however, one of the hottest emerging-market consumer plays out there is Fomento Economico Mexicano (NYSE:FMX), also known as Femsa. This is a beverage giant in Latin America with its Femsa Cerveza subsidiary ranking as the second-largest brewer in Mexico, creating beers you might recognize from U.S. grocery stores including Tecate and Dos Equis. The parent Femsa also holds a majority ownership stake (54%) in Coca-Cola Femsa (NYSE:KOF) — which is the largest independent bottler of Coca-Cola (NYSE:KO) products in the world and serves all of Latin America — and a 20% stake in Heineken (PINK:HINKY).
Jon Markman, editor of Trader’s Advantage, just recommended Femsa as his top stock to buy and hold for all of 2013 — and after picking a staples play last year in Hershey (NYSE:HSY) that delivered 20% gains in 12 months, he’s worth listening to. Here’s why he likes Femsa:
I like a steady company like this because I suspect 2013 could be a bit rocky for the U.S. as we start to get the hang of the whole austerity thing — higher taxes, less government spending and all of that. In this kind of environment, you need something special to grow, and I think Mexico has one of the greatest potential growth profiles in the world. It has a very solid government, well-managed budget, a fantastic skilled workforce, and lots of natural resources.
He also goes on to point out the power of Femsa beyond just beer and Coke:
It also owns the Oxxo chain of convenience stores, consisting of more than 9,500 units across Mexico and Colombia. The stores are Mexico’s largest convenience store chain, and analysts expect another 3,000 stores over the next couple of years.
The firm has continued to expand its brand and business reach, as subsidiary Coca-Cola Femsa two years ago acquired all the shares of Grupo Industrias Lacteas in Panama. This deal allows the company to enter the milk and dairy products category and further expand its non-alcoholic beverage business.
Femsa caters to more than 1.7 million retailers and 215 million consumers, and is the No. 1 beverage provider in every region that it operates in. The firm has grown revenues by 16% annually for the last 10 years.
If that’s not enough to entice you, Louis Navellier also is investing in FMX stock via his Blue Chip Growth newsletter:
FMX is an industry leader in many respects. Of the 48 companies in the Brewers industry, Femsa ranks second for long-term growth rate, fifth for return on equity, and sixth for sales growth. FMX also boasts the third-highest dividend — with a 1.3% annual yield. Femsa typically pays its dividends each May and November.
While Femsa isn’t due to report fourth-quarter earnings until the end of February, we’ll want to keep this announcement on our radar. Analysts currently forecast 3.1% sales growth and 17.6% earnings growth followed by an even better performance for future quarters.
There are many ways to play emerging market staples, but FMX is a favorite right now. Just be careful because the shares have run up about 450% from the 2009 lows and the chart seems to only go up. Shares are up 60% in the last 12 months, four times the returns of the S&P 500. The forward P/E is a little pricey, around 25, and there’s the risk of buying a top — but if the growth keeps up and investors rotate into riskier plays, FEMSA stock could continue to move significantly higher.
- Read Jon Markman’s full take on Femsa in his article, “Quench Your Thirst for Growth With Femsa.” (InvestorPlace)
- Femsa’s next move could be a refrigeration plant in the Philippines in a move to increase its reach to the Far East. (GMA News)
- Oh yeah, and it just bought a smaller beer company in Mexico last week in Grupo Yoli. (The Deal)
- Nestle is getting into bottled water in China, even though the market is declining in the west. (Bloomberg)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.