The Frontier Market Drug Company with 15% a Year Growth
By Jeff Opdyke, Investment Director
Dear Sovereign Investor subscriber,
You’ve probably heard or read the tired axiom many times that when America sneezes, the rest of the world catches a cold. It’s one in a long list of beliefs that has U.S. investors wedded to the notion that the Western markets are the best place to grow and preserve your wealth – and everywhere else in the world is just a dangerous pit of wealth destruction.
But as with so many other tired beliefs, this one is wrong, too.
And I’ve come armed with a small bit of proof. Take a look at this chart …
Notice the top line, Sub-Saharan Africa. The place that most of America perceives as a tempest of famine, pestilence, corruption and war basically sailed through the global financial crisis that pushed the U.S. and Europe to its knees – a position where both remain today. Though I’m not necessarily pointing you to Africa, that dashed line tells you one unassailable fact: Not every country catches a cold when America sneezes. In fact, some economies don’t even pay attention.
The Best Returns Always Come from Smaller Stock Markets
The markets that care little about the direction of America are known as the “frontier markets,” some of the smallest economies on the planet. But their small size is what makes them so appealing to us as investors.
Small economies grow fast because they’re coming off such a tiny base. And because they tend to be what Westerners still regard as “third-world” countries, there’s not the same abundance of investors. That gives us an advantage we don’t have when we’re trading in the U.S. or most other major stock markets.
When you’re one of the few miners panning for gold in an overlooked creek, you have a much better chance of dredging up the big, valuable nuggets. That’s exactly what the frontier markets are … overlooked creeks where big nuggets hide in plain sight.
There’s a chart I use in many of my presentations that shows the top stock-market returns by country, going back many years. Much of the top 10 reads like a list of countries you expect to find on the nightly news, because some insurrection or coup or social upheaval – places like Zimbabwe, Pakistan, Oman, Ivory Coast and Ukraine. You rarely find a Western nation in the mix … and never – not once – has the U.S. topped the list.
Even in our best years, the mid- to late-90s, when U.S. stocks were soaring, frontier markets from all over the world were generating stock-market returns two-, three- and five-times greater than American gains.
Aside from the obvious reason that small economies grow faster than large ones, unknown companies in overlooked markets generally trade at ridiculously cheap valuations … and no matter where in the world it exists, institutional investors always sniff out cheap values and dive in.
Taking AIM at the Frontier Easily
Personally, I access frontier stock markets by opening local brokerage accounts around the world, in places like Zambia, Egypt or the United Arab Emirates, among others. I do so because it’s the purest way to gain access to the kinds of small- and mid-sized local companies that are the direct beneficiaries of small, local economies. This is how I direct readers of my Emerging Market Strategist investment newsletter to invest in Asia.
But an intrepid constitution is not a mandate for pursuing profits in the frontier.
You can gain access to frontier companies from the Philippines to Algeria through the London Stock Exchange’s junior Alternative Investment Market, or AIM.
Much more so than New York, London is a financial hub for small companies from Africa, the Middle East, India, Southeast Asia and even parts of South America. It’s where much of the world’s frontier investment managers and analysts work.
And because it’s London, that makes it easy to trade from the U.S., given that every major online brokerage firm allows you to buy and sell on the London exchange.
To get accustomed to trading in the frontier through London, I recommend you grab a few shares of a Bangladesh-based drug company that is listed on AIM.
The company is Beximco Pharmaceuticals (AIM: BXP)
Beximco is Bangladesh’s largest exporter of pharmaceuticals, shipping a portfolio of more than 400 generic and branded-generic drugs to more than 45 countries across the developing world, mainly developing markets like Cambodia, Myanmar, Vietnam, Pakistan and others.
Though many of the inhabitants of those countries are impoverished or barely hanging onto the lowest rung of middle-class (i.e., the working poor), spending on medical care is exploding across the developing world. Along with better food and shelter, improved healthcare is one of the first expenses a family makes when it starts earning more … and it’s one of the prime budget items in countries that are using newfound commodity wealth to improve society.
Drugs are a big part of the trend and, as such, Beximco is in a sweet spot.
Fast Growth at Cheap Prices
Beximco’s strengths are in antibiotics and drugs to treat diabetes as well as respiratory, central nervous system and gastrointestinal disorders, among others. Competition in generics is fierce, and even in Bangladesh’s Beximco Pharma is one of several drugmakers. But it’s the largest and it’s stealing market share from rivals.
The company has been around for more than 35 years, and today operates a state-of-the-art manufacturing plant outside of Dhaka, the Bangladeshi capital. That might sound sketchy, but Beximco’s facilities have received the equivalent of the Good Housekeeping seal of approval from food and drug regulators in major markets like Australia and Austria (and Austria’s approval is recognized through the entire European Union).
Sales last year approached US$90 million, up a healthy 17% – and they should grow another 15% or so for the next several years.
Indeed, Beximco has a big catalyst in the offing. Branded drugs worth $150 billion in global annual sales are coming off patent in the next few years. Beximco will play a role in cranking out knocks offs of those blockbuster drugs, and will make them available at prices consumers in developing markets can afford. That will drive earnings.
Perhaps best of all, Beximco is ridiculously cheap. The shares trade at just six times 2012 earnings and just two times cash flow.
That’s cheap.
It might take some time for investors to catch on to the good story that is Beximco. But they will catch on, and Beximco will soar.
Until next time, keep a global view…
Jeff D. Opdyke
P.S. Emerging markets are amazing frontiers for new investment, but they can also show us trends that may be soon making their way to our shores… and with new trends come new opportunities for investment. The growth of digital currency is one of those opportunities, and in my latest special report, I’ll show you how you can profit from the coming Death of Cash… click here.
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