With weak currencies hammering European sales and oil's high price dampening global growth, sniping at companies with extensive global exposure has become something of a habit on Wall Street.
And not without reason. Look through the
S&P 500 companies with the greatest exposure overseas, and you'll come across plenty that have lately warned that their third-quarter numbers won't be up to snuff. There's
, with 72% of its sales coming from abroad, and
, 62% foreign exposed. There's
, 52%; and
, 56%. With bathwater like that, who cares about the baby anymore?
But generally speaking, not owning companies with overseas exposure seems like a nonstarter. This is an age of globalism, after all, and market forces are breaking down barriers in a way that neither tanks nor diplomacy ever could.
"The total trade contribution to global GDP growth is accelerating," says
chief investment strategist Jeff Applegate. "That suggests you want to be more globally exposed. Plus, we're going to have some policy changes. The president will soon sign the preferred trading legislation with China, and next year China is in the
But when global growth is winding down, a company that has expanded its footprint overseas may pay a heavy price. When a company links itself to the ups and downs of the world economy, profits become much more cyclical. This has been the case with consumer staples companies, which have seen earnings growth become more erratic as a result of heavier overseas exposure, notes
chief quantitative strategist
This is not the way it used to be. It used to be that the U.S. economy was in a boom-and-bust cycle and by expanding overseas you could actually mute the cyclicality of your earnings. "Now that
emerging markets are starting to mature and show cyclicality, it's coming back to haunt those companies," says Bernstein. "Ten years from now, it would not be inconceivable to find that companies have reduced foreign exposure. That sounds like heresy, but it's an issue that should be considered."
Steady as She Goes
Investors tend to pay a premium for companies whose growth is less cyclical because they offer steadier streams of profits and management can better plan for the future. Strictly speaking, companies whose profits grow steadily through thick and thin are considered growth companies. Big pharmaceutical companies are considered growth. So is
. Companies whose profits are tied more closely to the economy's ebb and flow are considered cyclical. Obvious examples are retailers, automakers and basic materials companies. When the economy shifts up, money tends to flow into cyclical companies; when it shifts down, money flows to growth.
Most investors would probably categorize tech companies as growth, but that may be a mistake -- at least when it comes to the big techs in the S&P 500. And heavy sales exposure overseas may help explain why that is.
The S&P techs get about 34% of their revenue from overseas, according to recent research from Merrill's quant group, the most of any sector in the index. Per se, that doesn't mean tech has become more cyclical. The big argument for tech being in the growth category is that worldwide demand is so strong that the cycle doesn't matter. Even when a manufacturer, for example, sees growth contracting -- heck, maybe
when it sees growth contracting -- it's going to want to buy the latest productivity-enhancing gizmo.
But when a big technology company gets a significant portion of its profits from overseas, perhaps the technology it sells has entered a more mature phase. Partly, this is just a factor of the times. Once it has expanded operations, set up a global distribution system, developed vendor relationships and what-have-you, it's not so cutting-edge anymore. And it's big enough that growing at the pace it did in its early years is pretty hard.
More important, it says something when a tech company gets a diminishing share of its profits from the technologically advanced U.S. If it can't keep domestic sales growing at the same pace as international sales, maybe that signals a demand shift. Maybe people in the U.S. already have the company's cool technology, and maybe the new-and-improved version isn't so new and improved that it will set off a rush to buy. Maybe the company is turning cyclical.
"It's like the demand for cars," says
Banc of America Securities
strategist Tom McManus. "There was a while there when
first started pumping them out that autos were a huge growth industry." Now auto sales are so cyclical that economists watch them to try to figure out what's going on with the economy.