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Jonathan Yates
Time to “Be Greedy When Others are Fearful” with Emerging Market Stocks?

A recent article on the front page of The Wall Street Journal by Alex Frangos, Sudeep Reddy and John Lyons, “Emerging World Loses Growth Lead,” reported on how emerging market nations like China, India, Brazil, and Russia are no longer leading the world in economic growth.  As a result of this change in economic growth for the world’s major economies, many blue chip stocks that do business in these nations have fallen.  As legendary investor Warren Buffett has stated about times like these, “Be greedy when others are fearful.”

Many of the stocks that have fallen are natural resource companies.

That is due to the enormous demand for commodities that China has: for many, such as copper and coal, the People’s Republic is the world’s largest consumer.  In other posts on this site, it has been detailed how companies such as Caterpillar (NYSE: CAT), based in Illinois and a Dow Jones member, are off due to the slumping economic growth in China due to the importance of that market for the firm’s products and services.  In Australia, BHP Biliton (NYSE: BHP) is down for the same reason.

BHP Billiton is the world’s largest natural resource company.

For 2013, it is down 12.35%.  By contrast, the Standard & Poor’s 500 Index (NYSE: SPY) has risen by 20.05%.  That is due to economic growth being down in China, as BHP Billiton, like many Australian natural resource firms, is heavily dependent on increasing consumption from the People’s Republic.

China is still growing, but nowhere near the double digit pace of the past decade.  That is why earnings-per-share growth is done more than 30% this year for BHP Billiton.  Next year, however, the analyst consensus is that earnings-per-share growth for BHP Billiton will rise to 12.92%.

Even though the share price is off for BHP Billtion this year, the returns are very strong.  The return-on-equity, always a favorite for Buffett according to his biographer, Carol Loomis of Fortune magazine, is 51.80% for BHP Billiton.  By comparison, the return-on-equity for Coca-Cola (NYSE: KO), Buffett’s largest holding, is just 26.30%.

The rebound in China will take a long time.

That means it will take BHP Billiton time to roar back to its decade high of close to $100 a share back in 2011.  But there is a dividend yield of 3.67% that pays shareholders to wait.  That dividend yield is almost twice as high as the average for a member of the Standard & Poor’s 500 Index.  There is also plenty of cash flow to raise the dividend and fund share buyback programs to reward stockholders.



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