A Billion Ways to Make Money

By Andrew Gordon

Dear Reader,

A billion consumers.  Sounds good, doesn’t it?

What company wouldn’t be salivating to supply a billion consumers with whatever they want or need?  Especially now, when Wall Street is pleading for “Bear-market Ben” to bail them out.

Great timing, yes?  American companies should be thanking their lucky stars.

But they’re not.

Instead they’re giving these consumers the back of their hand.

You see, the newest global consumer is poor.  Well, not just poor.  Dirt-poor – at least by our standards.

I’ve mentioned to you many times the growing consumer power of the global middle class.  It’s a huge deal.  Well, these people aren’t them.

You see, on their way to the middle class, these economic climbers make a pitstop.

Some rest only briefly before moving on.  Some take much longer.  And some stay forever.

On their way from abject rural poverty to a comfortable middle-class life, these upwardly mobile citizens of China, India, Russia, Mexico, Brazil, and elsewhere have to squeak out a meager living … at least for a while.

It’s much more than what they would be making on the farm.  But it’s also much less than what they will be making a few years hence.  Think of the factory worker who worked as a street vendor when first arriving in the city … or the call center worker who was a part-time kitchen helper before finding something better.

These people can’t afford much.  But they can afford a lot more than they did back in their village.

So which companies are going to supply them with $99 laptops?  Or $10 cell phones?  Or $3,000 cars?  Or $12,000 houses?  Or TVs, computers, stoves, fridges, and a thousand other things that they would love to buy.

But only if the price is right.

The question is: Are American companies down to the task?  Can they ratchet down technology, features, and packaging to meet the rock-bottom prices these consumers need in order to buy?

I’m guessing no.  But I’m prejudiced.

When I was an international businessman, I saw American companies time and again engage in overkill.  They’d try to sell sophisticated and very expensive equipment to customers with neither the training nor money to buy it.

They invariably left the meeting scratching their head.  “This is our best product … the best in the world.  And they don’t want it?  What is that about?”

Product upgrades involve better technology, sleeker designs, more features, and fancier packaging.  American companies are great at doing that.

But going in the opposite direction?

It’s not as foreign an idea as you think.  Consider watches.

Once upon a time, watches were made only by skilled workers in technology-advanced countries such as the U.S., Germany, or Switzerland.  And they lasted forever.

But then watches began to be manufactured in Asia.  They became less accurate and durable, but had more features (because they were so cheap to include).  And they came in all sizes and shapes.

Those watch companies that continued to make only the same expensive watches didn’t survive.  For example, good ol’ Timex was almost one of those companies.  But it survived the 1970s and 80s and came back strongly.  It now manufactures watches in the Far East in addition to Switzerland, and makes brands (Guess, Nautica, Ecko, Opex, and Versace) at different prices for different groups of customers.

Another example.  What does a scaled-down car look like?  Well, cut horsepower by 50-70 percent, eliminate AC and radio, install only one windshield wiper, offer only manual steering, and presto, you have a car that the middle class won’t touch.

But it’s a whole lot better than piling your family on a motor scooter to go to the local grocery store.  And if it goes for less than $3,000, then the sub-middle class can actually afford it.

This car will be available at any Tata Motors-dealership in India later this year.  It’s not for India’s middle class (who already have cars).  It’s for its sub-middle class … the people who up to now can’t afford a car.

Again, this isn’t the ground-breaking idea it seems.  Remember the Volkswagen Beatle?  Back in 1967, for $1,640 you got a 53-horsepower car that could go up to 70mph. 

Of course, that was downhill and with a strong tail wind.  How do I know?  I used to drive one of these babies back in the day.  Going up long hills, you’d start off in fourth gear (its top gear), then 10 seconds later downshift to third, then second, and for the really big hills, all the way down to first.  Then you’d start praying that you didn’t stall out.  But, believe it or not, they were fun cars.

The lesson? A product with eccentric styling and the basics can hit a sweet spot … and be a runaway success.  If it can happen in the U.S., who can doubt that it can also happen in countries like India?

Sure, these consumers have skinny wallets.  So what?  It’s still new money that wasn’t being spent before.

Those companies that can tap this new huge consumer class will grow no matter what our economy does.  And that’s going to make them pretty special.

Good Investing,

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

[Ed. Note: With a bear market looming, it’s more important than ever to select safe investments that produce monthly dividend income. Click here to learn about Andy Gordon's INCOME service that selects the best dividend-paying stocks available.]

Market Watch

When Growth Comes to an End

By Andrew Gordon

The price/earnings to growth (PEG) ratio is a great way to get a quick snapshot of a company’s value and growth prospects.  Let me briefly tell you how it works and why it might not be such a good idea right now to give it as much weight as before. 

P/E tells you how many years it takes a company to accumulate earnings equal to the price of its total shares.  If the price is a million bucks and earnings are $100,000, it would take 10 years (P/E = 1 million/100,000) for the company to pay off the value of its shares from its earnings.

Okay, that’s P/E.  Are you still with me?  The “G” or “Growth” part of the ratio refers to estimated annual growth for the next five years.  It’s a number that comes not from the company but from analysts following the company.  These analysts are not infallible.  It’s a best estimate.  No more, no less.

But in times of transition, these forward-looking numbers can be suspect.  And as we move into a recessionary period, many growth estimates for companies haven’t caught up to the reality of a slowing market.

Let me give you an example of how PEG might mislead you.  A P/E of 12 and a growth estimate of 12 percent yields a PEG of 1 (P/E divided by growth).  A PEG of one (or lower) is very good.  But what if the growth estimate is too high?  What if six percent is more realistic than 12?  The company’s PEG would spike to 2, which is unimpressive.

The smart contrarian play is to take a second look at the low P/E and growth companies.  A company with a P/E of seven (anything below 10 is considered good value) and a growth estimate of five percent a year may be appealing because as a “value” company, its slow growth is already built into the price of the company.  Slower growth shouldn’t hurt it as much as when a “growth” company slows down.  And if it can manage to meet its modest growth expectations, it’s ahead of the game and its share price could rise.

In other words, value looks like a better deal than growth right now. 

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