Investing in India: Part I

By Ian Wyatt, Big Idea Investor | USO | Apr 11, 2006 | comment

The Results Are In...

First quarter results have been tallied, and boy do things look good. 

However, many are generally speaking unexcited about the markets.  Crude oil is now trading in the high $60s on concerns about oil supply issues in Nigeria and Iran's desire to not play nice with other countries by continuing its plutonium development projects.  Meanwhile at home gasoline prices remain high, Congress is trying to figure out how to manage the 11 million illegal immigrants in this country, and new Fed chief Ben Bernanke remains determined to continue raising interest rates.   

All in all, one would expect that all this negativity would translate into poor investment results.  Fortunately, that is not the case. 

The major indices including the Dow Jones and Nasdaq posted respectable first quarter returns of 3.7% and 6.1% respectively.  But the real appreciation has been in small cap land, as evidenced by 13.9% gains for the Russell 2000 (NYSE: RUT) and 14.1% gains for the Russell Microcap Index (NYSE: IWC) during the first quarter of 2006.  Annualized, these small company returns translate to a very impressive 55.6% and 56.4% respectively.   

We're not suggesting that these returns can hold up in every other quarter of this year.  However, these early gains in 2006 speak toward the continued financial out performance of many leading small and micro cap companies.   

These early 2006 gains come on positive year end financial results from many public companies with bright outlooks for the coming year.  Despite increased expenses as a result of Sarbanes Oxley compliance and the (now required) GAAP expensing of stock options, financial results on the whole appear relatively strong. 

Valuations appear to be creeping up after several years of big gains in small cap land.  It remains easy enough to find companies demonstrating strong quarterly and year-over-year growth in revenue and earnings.  It is simply more difficult today to find attractively priced high growth companies than it was in previous years.   

My two investment advisories, Growth Report and Rising Star Stocks both aim to uncover outstanding small and micro cap growth companies.   

At Growth Report we focus on small caps that have proven their products and services through several years of improving financial results.  We seek to buy companies that are profitable and growing both revenues and net income by at least 20% per year - and preferably much more.  An equally important part of our process is valuation, as we seek to buy high growth companies that represent a compelling value.  This most often leads us to small caps with market capitalizations in the $100 million - $500 million range, although we occasionally invest in bigger companies or "hold" onto shares of our small cap growth companies as they grow to as much as $3 billion.  Our average annual return of 18.4% since 2001 speaks toward our long-term out performance. 

Our approach at Rising Star Stocks is very different.  Our goal is to own tomorrow's big growth stories well ahead of other investors.  The companies we are often riskier, yet also provide for greater potential returns.  We like to think of our investing approach as being similar to a venture capitalist.  In our portfolio we make many bets on young companies with great prospects.  We aim to own companies that are truly unknown - no analyst coverage, no media coverage.  Just great management, revolutionary products or services, and a large market demanding change.  Our strategy leads us primarily to small and micro cap companies, with the typical market cap being below $250 million for a portfolio holding.  Our approach for seeking big returns has panned out with True Religion (+1,458%) and Fronteer Development (+315%), and also led to returns of 62% in 2004 and 19% in 2005. 

I invite you to test drive each of my newsletter advisory services.  Try either service absolutely free of charge for 30 days to see if it's a good match with your investment strategy.  If not, just cancel online or call my office at 202-986-6333, 4# and you won't pay a cent.   

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Best Regards,

Ian Wyatt
Publisher
Big Idea Investor

India - Still a Good Investment?

By Nancy Zambell, Staff Writer, Big Idea Investor 

Outsourcing Prowess and Demographics will keep India on top 

India, the fourth largest country in the world in terms of purchasing power parity, has single-handedly turned the global outsourcing industry inside out, as the country has propelled itself into THE place to go for companies seeking to reduce expenses by sourcing human resources outside of their borders. 

According to market research firm Gartner, India has been doubling its outsourcing services for each of the past four years and now commands some 85% of the business process outsourcing (BPO) industry. In 2004, more than 250,000 employees in India earned greater than $2 billion from outsourcing, a figure forecast to grow to $13.8 billion by 2007. 

By 2010, the National Association of Software and Service Companies (NASSCOM) projects that Indian companies engaged in information technology (IT) and BPO, together could earn $60 billion, expanding at 25% annually and employing 2.3 million people directly, and 6.5 million indirectly. 

Sounds fabulous, doesn't it? It is, but there are a couple of possible flies in the ointment for U.S. companies: forecasted labor shortages and rising wages. 

Although Indians are becoming more widely educated, with a 64.8% overall literacy rate, just 25% of tech grads are suitable for IT and only 10%-15% have the necessary requirements for BPO employment. Wages for a typical call center employee have jumped 30%-50% in the last few years - increases that have not been passed through to the U.S. companies who contract with the Indian outsourcers. 

The result?  Competition from countries with lower cost structures is beginning to heat up. Pundits advise that more than 50 other countries, including the Philippines, Vietnam, Malaysia, Hungary and Poland are sneaking up behind India to challenge its outsourcing supremacy. 

Yet businesses including Microsoft and British insurer Aviva PLC continue to place their bets on India, with both of them planning to increase employment by more than 3,000 workers in the next few years. And forecasters estimate that India will not be left behind. This is why: 

1. India's middle class population - the source of many outsourcing workers, is growing. This segment of the population is now believed to be somewhere between 250 and 500 million people, who are consistently opting for higher education, which is creating a more sophisticated and trainable workforce. And while 25% of India's engineers have the skills needed to make the grade globally, just 10% of Chinese tech pros can say the same. Annually, the country is turning out 2.5 million mostly English-speaking graduates, ready to enter the workforce.
    

2. The country's population - unlike its oft-mentioned competition, China - is very young. More than one-half of its 1.2 billion population is under the age of 25, portending many viable and productive working years ahead. And its population is forecasted to surpass China's by 2035.
    

3. India's businesses - known for their knowledge base, rather than manufacturing base - will simply upgrade their product offerings and services, beyond the capabilities of the competition breathing down their necks.

There is still plenty of room left for outsourcing growth in India. But the question remains, how does this success turn into investment gains?
 

Investing in India is in its infancy 

According to the National Intelligence Council, India is a global power in-waiting, ready to take a leadership position as early as 2020. Some experts have even gone out on a limb, claiming that India could become the world's largest economy within the next half century. It's no wonder that President Bush recently came-a-courtin', hoping to turn New Delhi into a steadfast new ally, at the risk of offending Pakistan, a long-favored friend. 

The country's exports - if they meet India's realistic target of $150 billion - will create 13.6 million jobs by 2009-2010. If, however, they grow to the government's more aggressive target of $165 billion, it is estimated that a whopping 21 million jobs will be created. More jobs means greater innovation and additional product and service offerings, a winning combination for Indians, as well as their customers and investors. 

Additionally, India has two important advantages that will boost the expansion of its investing climate:
 

The country's democratic government is pro-business 

India's democratic government is well-established and its business climate is favorable to business, entrepreneurs and innovation, who keep a keen eye on cost containment and return on investment 

The Indian economy has grown at an average 6% annual rate for the past few years, helped along by a couple of major government moves including the tax reform of the 1990s that boosted disposable consumer incomes and increased the purchasing power of the middle class. And the government's repeal of the hated value-added-tax last year further spurred spending and investing.


India's financial sector is poised for expansion 

The country's banking and financial institutions are stable and market-focused, and India's banks are actively wooing customers. To date, Indians own more than 12 million credit cards and finance 80% of their auto purchases through banks, evidence of rising confidence in the financial system, and a great indicator for future opportunities in the financial sector.  

The investment arena in India is heating up too. 2004's M&A activity more than doubled - to 316 deals, worth greater than $9 billion. And the 2003 & 2004 IPO markets raked in $53 billion in deals, while private equity investments totaled $420 million.  

And although institutional and foreign investment activity is soaring, individual investors are not being left out. More than 20 million Indians own shares in the country's 9,000+ public companies, more than any other country outside of the US and Japan. Shares trade via 23 stock exchanges in India, and total returns have averaged 34% and 41% respectively, for the past couple of years.  

Those are pretty impressive numbers for an investing climate just beginning to emerge, spelling great opportunities for investors.  

We see several sectors that may offer tremendous prospects for astute investors: 

'         Global services are information or technology-based, rather than manufacturing-centered, requiring less capital investment, thereby opening the door for rapid expansion

'         The telecom industry is booming, with cell phone usage climbing 53.5% in just 18 months, just the beginning of the coming surge

'         The country has a housing shortfall of 80 million homes, a huge opportunity for growth in the building industry

'         Obsolete infrastructure is due for significant upgrades

'         New FDA office may portend an influx of generic drug manufacturing as hundreds of American drugs come off patent

'         The retail industry is beginning to shine. As evidence, India is Wal-Mart's second largest sourcing market, providing $1.4 billion worth of textile, leather and jewelry - and quickly expanding  

Yet, currently, Indian stocks are still trading cheaply and the country's rate of investment is less than 25%; Simply put, this creates a ripe investment climate ready to explode. 

The biggest problem facing investors is that investing by foreigners has typically been confined to a few mutual funds and multi-nationals doing business in India. But the climate is changing. Investing in individual Indian companies is getting easier, as well as investing in Indian-related venture capital funds. 

India will soon be ripe for the picking, and you won't want to miss out on the opportunities that will accompany its global resurrection. We will tackle this new investing climate in subsequent articles, with helpful tips to assist you in building your Indian investment portfolio.


A New Way to Play the Oil Game 

By Big Idea Investor Staff 

With crude oil being the focus of the market for several years, the new crude oil ETF (AMEX: USO) now allows investors to place bets on the world's most important commodity without having to dabble in the futures markets.

The United States Oil Fund, designed to closely track the price of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma, began trading on Monday. 

Despite its name, the United States Oil Fund is not a mutual fund.  Rather, it is structured as a commodity pool and is operated by Victoria Bay Asset Management.  The United States Oil Fund debut comes at a time when crude oil prices have risen nearly 30% over the last year, and more than 80% over the past two years.

In contrast to the first commodity ETF, the StreetTracks Gold Trust (NYSE: GLD), which physically holds gold bullion in a vault, the oil ETF will invest primarily in futures in order to replicate the price of its commodity.

According to the prospectus, the ETF will have a management fee of 0.50% plus brokerage fees of 0.35% for trading in oil futures contracts and treasuries.  Should the ETF exceed $1 billion in assets, the management fee will be reduced to 0.20%. 

Many investors are quite excited about the oil ETF with oil trading near historical highs.  However, now might be precisely the wrong time to go long on black gold. Investors who get in on the commodity now with the expectation of further price increases should take heed to the statement that is plastered over all prospectuses: "Past results are not an indication of future performance." What about shorting oil? With the insatiable appetite for oil in the U.S. combined with the rising demand from the developing world, we wouldn't want to bet on oil prices taking a tumble anytime soon either. 

Instead of speculating on short-term price trends, investors might be better served by buying the stocks of companies whose fortunes are not directly tied to commodity prices.  Which companies are these, you ask?  

We are talking about oil and gas services companies - those companies that provide the tools to exploration and production companies that engage in the search for oil and development of oil fields. 

Demand for oil and gas services is soaring, not only leading to record sales but also increasing prices and profit margins.  Companies that engage in drilling and seismic data services are some of the brightest in the sector, and are providing investors with big opportunities in 2006.   

The best part is that investors are greatly discounting some of these great growth stories of the year due to concerns about commodity prices.   

At our small-cap investment newsletter, the Growth Report, Editor Ian Wyatt and his research team recently assembled a 41-page report that features 6 such companies.  

Get a copy of Oil Rush of 2006: Top Six Oil & Gas Stocks now! You can download your copy today when you sign up for a 30 day free trial to Growth Report.  If you're looking for fast growing companies for your portfolio, then the Growth Report is for you.  Sign up for your free trial now!

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