Jim Rogers Says Buy These
That sounds easy enough, right? Just find unimpaired companies, buy them, and wait. In essence, there couldn’t be better advice right now.
Of course, the question then is, “When should I buy unimpaired assets and businesses?”
For instance, Google (NASDAQ:GOOG) is going to be a mainstay on the Internet for years to come. Its market share is growing and its competition is fading.
And it’s making all the right moves during a downturn. It’s cutting expenses. It’s socking away cash (as much as $1 billion a quarter) and getting ready to deploy it when opportunities arise (there aren’t going to be any bailouts for dot-coms, so market share will go to the best companies, not the best-connected companies). It’s not senselessly buying back shares either to keep management’s stock options more valuable at the expense of the shareholders.
Google’s making all the right moves to thrive when the global economy does recover. The company is the very definition of unimpaired. Even though Google shares are off more than 60%, it still has a P/E of 18, pays no dividends, and is valued like a growth stock which, although still growing strong, will grow more slowly over the years.
So it’s reasonably valued. Maybe it’s a little cheaper than it should be or maybe a little too expensive, but it’s not extremely cheap or extremely expensive, which creates low-risk/high-reward trading and investing opportunities.
We’ve got to be looking for unimpaired assets at impaired prices.
The name of the game is buy low and sell high. Right now, there is an opportunity to buy low in the business process outsourcing (BPO) sector.
The Big Five Four in BPO
To be honest, I’ve hated BPO for years. BPO is when “non-core” activities like customer service or accounting for a business are outsourced. The masters of BPO are Indian companies which provide basic business services at significantly lower costs.
Remember the other day when we resolved to ask ourselves, “Would I start this business today?” before buying any shares. Six months ago the answer would have been a resounding “NO” when it came to BPO.
It’s one of the worst businesses to be in. Workforces were large in order to create decent economies of scale. Costs (mainly employee salaries) increased at a double-digit rate for years as India’s economy was growing.
Worst of all, anyone could get in the game. There was no moat. BPOs all provided very similar services and the only way to get more market share was to offer better prices. As a result, margins were pretty low and only getting lower.
India’s BPO was dominated by Satyam (SAY), Cognizant (NASDAQ:CTSH), Infosys (NYSE:INFY), Wipro (NYSE:WIT), and Tata Consultancy Services (TCS – traded in India). They counted more than 40% of the Fortune 500 companies as customers.
There wasn’t much room for competition. They would battle it out for customers and undercut each others’ prices just to get a contract. It was great for customers, but bad for all these businesses. All that changed a few days ago.
The Enron of India
On January 12, Satyam reported it cooked the books to the tune of about $1 billion. It was never there to begin with. Satyam’s chairman (who is sitting in Indian prison right now) basically said it was all a ruse and it started out as something small and grew right along with the company.
It’s all over for Satyam now. After all, if you were a CFO at a Fortune 500 company why would you want to have a company which is being touted as the “Enron of India” to manage your accounting?
It doesn’t make any sense. And a few of Satyam’s customers already started to leave. State Farm Insurance announced it was leaving and other key customers could soon follow.
Satyam has between $350 million and $500 million in contracts which are up for renewal this year. That works out to between 15% and 20% of all revenue. Among the key customers who could be on their way out are Telstra, General Electric, Qantas, and DuPont. I’d be willing to bet there are plenty customers on their way out soon enough.
BPO: Zero Sum Game
Here’s the thing about BPOs, they’re just like any other commodity. When a company leaves one, it usually moves to a competitor.
In other words, what’s bad for Satyam is good for Wipro, Infosys, and TCS. They’re going to get handed market share in a business where you have to offer hefty discounts to lure customers away from competition. It’s a fantastic time to be in India’s BPO market…as long as you’re not Satyam.
It’s already started to happen. In a recent interview, TCS’s COO, Mr. Chandrasekaran said, “We are not in talks with any of their clients actively. Are any of their clients calling us? They are calling us, definitely.”
The Rebound in BPO
Here’s the thing. India’s BPO industry was rocked by scandal. Satyam has wiped away more than $5 billion in market value out of investors’ pockets. Satyam is clearly impaired. The rest of the BPO market is not. In fact, the rest of them will actually benefit from Satyam’s problems.
Despite the “good” news for Satyam competitors, they haven’t been rewarded by investors…yet. Wipro shares are off 10% since Satyam’s announcement. Infosys and Cognizant shares are up 1% and down 5% respectively over the same time period.
It doesn’t make much sense. Imagine if Airbus announced an accounting fraud, half the orders for its planes were cancelled, and it could go into bankruptcy. What would that do to Boeing’s (NYSE:BA) business? Or if SAP (NYSE:SAP) was about to be brought down by a major scandal. What would happen to Oracle’s business?
The same thing, to a lesser extent, is happening in the BPO sector.
Any way you look at it, as we’ve been saying in our 100% Free e-Letter, the Prosperity Dispatch, India is going to be one of the best places to have your money over the next five, ten, and 50 years. The combination of a young population, a good (and getting better) education system, and a reasonably moderate political system, it’s probably one of the most unimpaired countries in the world. It’s just a matter of finding the right opportunities at the right times. Right now is likely one of those times – for India’s BPO industry at least.
January 19, 2009
By Andrew Mickey
Chief Investment Strategist, Q1 Publishing