A panel of financial experts agreed that the U.S. economy has improved tremendously and articulated many different investment strategies that could be employed to capitalize on this situation.
These opinions were offered during a financial workshop held at the 88th Annual Meeting of Western Growers in Honolulu in November. The panelists included Quoc Tran of Lateef Investment Management, R. Dennis Moon of U.S. Trust Bank and Erik Davidson of Wells Fargo. Matt Lewis, president of Western Growers Financial Services, moderated the panel discussion and set the stage for the discussion by opining on the current U.S. economy. He said the “shale revolution” has the potential to bring energy independence to the United States within a decade or so and it is creating boom-like conditions in various economic and geographic sectors. He revealed that starting pay at a McDonald’s hamburger joint in parts of North Dakota is $17 per hour, reflecting those boom-like conditions.
Moon said there is a global rebalancing of economic growth occurring with developing nations playing a bigger role than they have in the past. Population growth and a rise in the world’s middle class is creating demand for higher end products and has the potential of producing sustained economic growth for quite some time.
Moon is bullish on an investment strategy that concentrates in three areas where he sees growth: food, forests and fuel. He said investors are hungry for real-asset holdings which include land that produces our crops as well as the timber needed for the building boom. And he agreed that the development of oil from shale in the United States is a strong driver in the economic recovery, and will continue to be so.
He rejected the notion that crop land prices, with their rapid increases of late, are trading at “bubble prices.” Moon said he does not see leverage being used to buy farmland, as was the case with housing when that bubble burst, but instead the prices paid are penciling out with a reasonable return on investment.
He believes the intrinsic value of a limited resource with increased demand is driving the price of land. He relayed that in 1960 the world contained one acre of arable land per capita. In 2030, because of population growth there will be a half an acre of arable land per person. Of course, better production techniques have made that possible as crop land today yields much more volume of product than it did 50 years ago. Still land is a valuable commodity and land prices reflect that.
Moon also subscribes to the belief the China will continue on its trajectory of being a net importer of food and fiber. He said while that country has 12 percent of the world's population, it has only 5 percent of the world's arable land. It will have to import to fill its own needs.
Why is the United States in such great shape for economic growth in these areas of food and fiber? Moon said that while we have only 2 percent of the world’s population, we have 12 percent of its arable land. Demand for U.S.-produced food and fiber should continue to escalate as the world’s middle class increases.
Davidson reviewed the first 13 years of this millennium and called it both the “best of times” and the “worst of times” borrowing from the opening of the classic novel, A Tale of Two Cities.
He said in the United States, the bad times were punctuated by two major stock market crashes, a great recession, high unemployment for an extended period of time and political dysfunction. Around the world things were just as bad, if not worse. He said Japan is still struggling with no easy solutions and its aging population will be a huge burden for years to come. “They sell more diapers (in Japan) to aging adults than infants,” he quipped.
On the best of times scorecard, he listed a U.S. economy that has experienced full recovery, high corporate earnings, a rising stock market and a growing middle class worldwide increasing demand for many items.
With regard to an investment strategy, Davidson urged the audience to diversify their portfolios both geographically and in type. He said for every $2 in U.S. investments, the smart investor will have $1 in foreign investments. He justified this strategy by stating that the majority of the world’s population, economic growth and wealth is not in the United States. The United States has a greater percentage of assets than its size would indicate, but still there is much economic growth and assets outside of our borders. Consequently, Davidson believes part of your investment money should also be elsewhere.
He is not a big fan, however, of diversifying into cash or bonds, which are considered “safe” investments. Maybe a small amount of the total portfolio for diversity sake, but Davidson said cash loses value every day because of taxes and inflation. Bonds might be a bit better, but he said they are a sure fire way to “lose money safely.”
Tran was much more specific in his investment strategies. His firm is very bullish on the stock market, but they invest the money of their clients very carefully. They research a company very thoroughly before investing in it and they only own stock in 15-20 companies at a time. Currently they like firms that depend on discretionary spending by consumers. Tran said the world's population growth and rise in the middle class means there will be a great demand for the products offered by these types of companies.
For example, the company owns a significant amount of Starwood Hotel stock. As his company surveys the world’s economic situation, they expect increased demand for hotel rooms, meaning Starwood’s bottom line should continue to increase. Tran likes a high degree of predictability in the companies he buys, and he wants the stock price to be undervalued in relation to future earnings. He said that although the Starwood stock price has doubled in the past four years, it is still selling at a forward multiple of only 14-15 times earnings. He expects the price to double again in the next four to five years.
He made a similar case for a stock in the cable television world — Scripps Network. Demand for paid television is growing all over the world and Scripps owns television networks that are providing content to the cable companies. Those shows are also producing revenue through advertising. He considers their profit generation predictable and the stock price reasonable.
He also mentioned that he likes MasterCard as an investment. Though credit cards have great penetration in the U.S. market, they have much room for growth globally. As the middle class grows around the world, he believes MasterCard will grow right along with it. The stock has quadrupled in about a half dozen years, but he said it can double again in the next several years.
(Editor's note: The information presented at the conference and in this story is not to be taken as investment advice nor does it necessarily represent the view of Western Growers or Western Grower & Shipper. Please consult your own financial adviser before making investment decisions.)
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