No matter how the current debt-ceiling debacle plays out on Capitol Hill, one thing is clear: We need to protect ourselves from Washington.
Unfortunately, just taking steps to protect ourselves isn’t enough.
You see, we also need to send a message – to let the “Inside the Beltway” crowd know that we’re less-than-thrilled with the brand of “leadership” that they’re providing.
Fortunately, there’s one single move that will fulfill both of these objectives.
It will provide you with some protection against Washington’s malfeasance.
And it will tell the Capitol Hill fraternity that their lack of concern about Main Street Americans is no longer acceptable.
I like to refer to this as “Beltway Bandit Insurance.”
And if you execute it correctly, this insurance strategy will pay off by fattening your tech portfolio.
A Port in a Storm
As you folks know, I’m a big believer in technology – and especially in U.S. technology.
Take a look at just about any big breakthrough – from the transistor to the semiconductor to the smart phone – and you’ll usually see U.S. firms setting the standard that the rest of the world adheres to.
All that innovation creates wealth … lots of wealth … which is why the tech sector represents such an alluring profit opportunity.
I believe that the road to wealth is paved by tech. And I also believe that America remains the world’s most-powerful engine of innovation.
Unfortunately, there’s an obstacle … one thing that can derail America’s high-tech profit locomotive.
And that obstacle is Washington.
The ineptitude of Congress, and a series of White House administrations, is one thing that could cause that U.S. high-tech locomotive to jump the tracks.
In our talk back on Aug. 13, when I told you about Mercardolibre Inc. (NasdaqGS: MELI) – the so-called “eBay of Latin America” – I explained that one motivation behind such an overseas investment like this was to diversify away from the financial goulash being created on Capitol Hill.
After watching so many domestic tech firms give up gains of 10%, 20% or even 40% in a mere matter of days following the Oct. 1 government shutdown, I knew it was time to continue that conversation.
Today we’re going to do just that.
And we’ll start with Mercardolibre.
A Special Path
MELI pioneered the concept of online auctions for Latin America nearly 15 years ago.
Ranking as the top “e-tailer” in that part of the world, Mercardolibre is uniquely poised to cash in on the massive growth in online spending that Latin America is experiencing. With roughly 81.5 million registered users, the company accounts for two-thirds of all of the online spending in Latin America.
MELI’s home market – Brazil – is simply on fire. Market-data firm Forrester Research predicts that Web-based sales in Brazil alone will hit $25 billion by 2017, which is more than double the $12.2 billion reported for 2012.
The upshot: Mercadolibre has been trouncing the returns of the U.S. market.
Over the past year, the U.S. Standard & Poor’s 500 Index has gained 15.6%.
Mercardolibre has done three times as well – generating a gain of 47%.
MELI’s stock was recently trading at $132 a share, giving the company a market value of $5.8 billion.
Now, some of you seem to find triple-digit share prices to be overly rich.
So let’s revisit another overseas tech player that we’ve talked about before.
It was on March 29, and the U.K.-based company in question is a clear leader in playing the Mobile Wave. It also offers us a much-lower price tag.
ARM Holdings PLC (NasdaqGS ADR: ARMH) designs the chips and related devices used in many of the world’s leading smartphones. With handhelds outselling PCs by a ratio of 5-to-1, this is a great business for ARM.
And while folks tend to label this as smartphone-only play, ARM Holdings is actually a much-more diverse electronics firm. The company also designs the devices used in tablet computers, DVD players and the so-called “smart” meters that are going to play an increasingly crucial role with the emergence of “smart” power grids, smart houses, and even smart cities.
By concentrating on chip design -and eschewing manufacturing – ARM has been able to create one differentiating “special sauce” after another.
This allows it to save the billions it takes to build the “fab” factories required to churn out chips – some of which can cost as much as $10 billion. Instead, ARM licenses out its chip technology to other companies – and collects hefty fees for its innovations.
You won’t find a better proof of that concept than ARM’s financials. The firm has operating margins of 37% and a return on equity (ROE) of 12%.
Last year, it generated free cash flow (FCF) of $261 million – which helped ARM achieve a cash-on-hand position of about $866 million.
ARM’s shares trade at about $47.40, giving the company a market value of $22 billion.
Besides these two great stocks, there is another foundational play that is also focused on global tech.
The SPDR S&P International Technology Sector Fund (NYSE: IPK) is an ETF that offers a broad play on several key sectors. IPK invests in electronic equipment and components, software, information-technology services, semiconductors, the Internet, and office electronics.
According to its most recent quarterly statement, the firm held roughly 120 stocks. ARMH makes up about 2% of its portfolio. Some other prominent stocks include:
- Samsung Electronics Co. Ltd. (OTC: SSNLF), the Korean giant that makes some of the world’s more popular smartphones, tablets and TV/computer monitors.
- SAP AG (NYSE ADR: SAP), the German software leader known for complex products that cater to the needs of large organizations.
- ASML Holding NV (NasdaqGS ADR: ASML), a Dutch big-cap firm that makes semiconductor processing equipment.
- Canon Inc. (NYSE ADR: CAJ), a broadly focused Japanese electronics company that makes laser printers, digital camcorders and lithography equipment.
- Flextronics International Ltd. (NasdaqGS: FLEX), which is based in Singapore and is one of the world largest contract manufacturers, making everything from PCs to medical products.
Those six stocks right there give us exposure to six different countries. However, the ETF is heavily weighted toward the two Asian nations of Japan and South Korea, which makes sense because of the sheer number of tech firms there.
Those two countries account for about 58% of the ETF’s holdings.
Europe is also well-represented, with firms based in seven Eurozone countries account for roughly 42% of the portfolio.
IPK trades at roughly $30 a share and outperformed the S&P 500 by 70% with profits over the past year of 26.5%.
But what you really have to like is the fact that it inoculates us against the continued ineptitude of the “Beltway Bandits.”
The road to wealth truly is paved by tech – even outside the United States.
See you later this week.
[Editor’s Note: With the interest in the Twitter IPO, I thought you’d find this to be a timely and intriguing column. Even if you opt to “wait and see,” just think of the attention you can command at your next work staff meeting, club get-together or dinner gathering when you tell folks about the “secret way to play the Twitter IPO.” If you do this, be sure to drop me a line and share your tale. In the meantime, thanks for the comments, concerns and interests that you shared earlier this week. It helps to know what you’re thinking about. Keep the comments coming.]