From: Nicole Urken
Sent: Wednesday, March 14, 2012 12:23 PM
To: James Cramer
Some of today’s top 20 % gainers:
• Basic Materials: CLF
• Technology: GWRE, PTNR, LSI, PWRD, GEOY, CEL
• Services: FRAN, CZR, RAD, RLD
• Financial: ZION, RF, MFC
From: James Cramer
Sent: Wednesday, March 14, 2012 12:36 PM
To: Nicole Urken
Subject: RE: Movers
We need to look at CLF on dividend –China read too.
Also: Guidewire!, We need to do FRAN, We need to do outlier banks
On Tuesday, we got controversial news out of China, a region whose growth trajectory remains a key component of the bull thesis for global equities. The news? An officer at BHP Billiton, the world’s biggest miner, said it was seeing signs of “flattening” iron ore demand from China—connoting slowing in Chinese steel production. Additionally, China announced a second price hike of gas and diesel. This all came on top of reports earlier this month of a high trade deficit (with imports exceeding exports to a higher degree than expected) and Premier Wen Jiabao unveiling a 7.5 percent economic growth target this year, down from 8 percent.
While these comments should not have come as a surprise, as a slow down after robust growth has been much expected, the news hit China-related plays including Caterpillar, Joy Global,Peabody, and Cummins—as discussed in Tuesday’s Mad Money market analysis piece.
No mercy was preserved for these names, despite what really was an incremental data point that supports a ‘soft landing’ thesis for the region vs a ‘hard brake’ fall-off. Not to mention that we have received positive “bottoms up” commentary from the likes of Caterpillar and Cliffs Natural Resources, whose CEO Joe Carraba provided details of solid demand trends amidst the company’s 123 percent dividend boost.
Sure enough, on Wednesday, Australia raised estimates for iron ore exports, most of which goes to China, by nearly 3 percent—quelling the fears that BHP spooked just 24 hours prior. (It is telling that copper behemoth Freeport McMoran has held up despite lingering worries).
However, the industrials with China leverage remain very volatile and vulnerable to incremental macro data points. Luckily, if you can’t take the heat, there’s another angle if you want to play growth in China … one which provides less volatility on incremental macro news. Consumer names! Ultimately, as China shifts from industrial/export to internal growth/import (as we’ve seen from the latest trade figures for example), this favors consumer over industrial.
So, what are the best consumer plays?
In food?Yum! Brands—known for its Taco Bell, KFC and Pizza Hut brands—is the best play. The company derives 40 percent of its profit from China and has ample growth opportunities in the region (YUM opened a record 656 restaurants in China in 2011 with another 600 expected this year). For other plays, look no further than Starbucks and McDonald's, which both offer upside in the region. Starbucks, which hosted its investor day on Wednesday, has much store growth opportunity in the region (they opened up 121 net new stores in China/Asia-Pacific just last quarter and has recorded comps in the country above 20 percent for six consecutive quarters). McDonald’s recently reported what were perceived as weak China comps, but the growth potential in the region remains strong—with the company looking to hit 2,000 restaurants in the country by 2013 (which implies mid-teens annual unit growth).
In retail?Coach represents the best value. While Coach exposure to China is in the mid-single digits, much upside remains, as sales in the region are expected to hit over $1bn in 2015 with market share growth and store openings driving the surge. The aspirational price point that Coach represents is well-suited to the country’s burgeoning middle class … and Coach has specifically referenced the opportunity in men’s globally (men’s handbags—known as “murses” to some—are very popular in Asia) along with e-commerce upside.
Another option? While Tiffany is more levered to Wall Street bonuses than Coach, with some European exposure to boot, the company has a solid foothold in China (about 18 percent of revenues) and is poised to grow even further. The company just reported a strong outlook for this year on Tuesday, a much-needed boost after lackluster results. Nikealso represents a play on China, which represents about 10 percent of revenues for this continually innovative athletic company behemoth. Even Gap is catching some upside from their China roll-out efforts, though this stock has represented more of a domestic turnaround and is less well-positioned in the PRC than Coach/Tiffany given lower-priced merchandise that must go head-to-head with fast fashion names like H&M with a foothold in the region.
In travel?Starwood Hotels remains the play on emerging market growth—with China an important component of that engine, as Starwood has 100 hotels in the country with another 100 under construction. Over 80 percent of the company’s pipeline is outside the US and is skewed toward emerging markets. Starwood’s CEO Frits van Paasschen has cited three important trends in globalization: (1) rising wealth—3bn people moving from poverty to prosperity with 70 percent of economic growth over the next decade coming from emerging markets, with China as a big driver, (2) technology—more reservations made online, (3) new generation demand—Gen Y is poised to be the largest consumer group in history, outspending Boomers before the end of this decade.
The bottom line: If you can’t take the industrial heat, go for some retail upside in the People’s Republic of China—and for that, look no further than the retail details for Yum Brands!, Starbucks, Coach, Nike and Starwood for starters.
"Inside the Madness" appears twice a week at madmoney.cnbc.com
When this story was published, Cramer's charitable trust owned Cummins, Yum! Brands and Freeport McMoRan.