The U.S. economy is expected to experience little or no growth in 2010 and possibly well into 2011. Nations like Brazil, India and China are expected to deliver solid growth results, absent some global economic shock. Since growth is directly tied to value creation for businesses, what's the choice between investing domestically versus abroad?
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The Balance Between Growth And Value
No matter how cheap a company's valuation appears to be, if it faces difficulty growing sales and profits, then no matter how low the share price, it's generally a sound idea to avoid it. An exception might be when the company's assets, unprofitable on their own, could fuel growth as part of another company. Then the assets may dictate value. Conversely, if a company shows signs of great growth ahead, it may ultimately appear valuable when at first blush it looked like an unattractively priced investment. Growth and value are two sides of the same coin that require one part art and one part analysis to find the happy medium between the two.
Too Rich?
An interesting article on Bloomberg illustrates the divergence between the U.S. markets and emerging market valuations and growth. Consider a company like Brasil Foods (NYSE: BRFS), a producer of meat, dairy products and processed foods in Brazil. It trades for a ridiculous 66 times earnings. But the company is expected to grow profits by more than 70% in 2011, and it sports a forward multiple of 22 times earnings. By comparison, ConAgra Foods (NYSE: CAG) trades for 14 times earnings, but it is expected to lift its profits by a single-digit percentage. In addition, ConAgra yields nearly 3.7 percent. But going forward, investors are saying that being a food company in Brazil offers a lot more growth opportunity than one in the U.S. due to expected economic growth going forward.
China Agritech (Nasdaq: CAGC) currently trades for 25 times earnings, but that earnings growth has been accelerating by over 100% a year. Indeed, its small size makes this happen, and it clearly won't last forever. But it's safe to assume that this nimble fertilizer company in China will likely grow profits at well above average rates over the next several years. By comparison, Agrium (NYSE: AGU) sports a P/E of 20 but stands no chance of growing at rates anywhere near CAGC due to its size and, to some extent, a cautious farmer mentality here in the U.S.
Preserving Capital
At the end of the day, any investment decision should have preservation of capital at the forefront of the thought process. In some cases, emerging market valuations are just too high despite the growth - and one small dose of bad news can lead to an exodus from the stock. On the other hand, in some situations future opportunities awaiting a company outside U.S. borders justify a premium. (For more, check out Does International Investing Really Offer Diversification?)
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