The Gap has faced sluggish sales in the United States for years. Some of this is due to the whims of fashion, but there is also a larger story to tell. Like so many other companies, The Gap has come to realize that the American consumer—that seemingly unstoppable engine that has powered the global economy for decades—is no longer firing on all cylinders. Growth, if it is to be found, will be found overseas.
There are several factors at work, any one of which deserves an article—or even a book—of its own to explain. The first and most obvious is the state of the economy. While I do not see a “double dip recession” in the near future, I do believe that we are in the early years of a Japanese-style slow-motion depression. Americans—like the Japanese before them—experienced a debt-fueled real estate bubble and consumption binge. And Americans—again like the Japanese before them—can look forward to a prolonged hangover in which the debts are slowly paid down.
The U.S. banks were quicker to write off their bad loans than their Japanese counterparts, but most are hardly eager to extend new loans. And even if they wanted to, it’s not entirely clear they’d have a lot of borrowers.
Demographics are also decidedly negative. The Baby Boomers, as the largest and richest generation in history, were the force behind the consumer boom of the past 30 years. But as the Boomers approach their retirement years, they are far more interested in saving rather than spending.
Against this backdrop, it shouldn’t be surprising that The Gap and other American companies are looking elsewhere for growth.
In The Sizemore Investment Letter, we also look abroad for growth. One of my favorite strategies is finding American and European companies with big exposure to emerging markets that have seen their stock prices sink due to concerns about their home markets. I call it “Emerging Markets Lite.”
The quintessential Emerging Market Lite investment is the Spanish telecommunications company Telefónica (TEF). Fears of a spreading European sovereign debt crisis have taken their toll on Spanish stocks. The broader Spanish Ibex index trades for 7 times earnings, as does Telefónica.
The problem with this is that Telefónica is not really a Spanish stock. Only about a third of its revenues come from its home market, while fully 40 percent comes from the fast-growing markets of Latin America.
Unlike their rich-world peers, emerging market consumers are not burdened with excessive debts. They have years or decades of spending growth ahead of them. The Gap figured this out a long time ago and has restructured its business accordingly.
I’m not recommending you buy shares of The Gap today. But I do recommend you invest in companies following The Gap’s strategy.
About the author:Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.
Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.