Carl Delfeld, editor of the La Jolla Letter and the Pacific Capital Gains, looks at the game of Monopoly as a metaphor for successful investing in companies that operate monopolies; he also highlights two favorite global monopolies—a Chinese telecom and a Brazilian water utility.
Steven Halpern: Our guest today is international investing expert, Carl Delfeld, editor of two leading financial newsletters, the La Jolla Letter and Pacific Capital Gains. How are you doing, Carl?
Carl Delfeld: Great to be with you, Steven.
Steven Halpern: Well, thanks for joining us. In your latest research, you discussed the value of investing in monopolies and you even liken that strategy to the famous board game. Could you expand on that?
Carl Delfeld: Sure. Well, we all had family Monopoly games growing up and it’s pretty clear who wins it. It’s the player who gets the monopoly quickly, builds hotels and drives everybody else out of the game.
But when it comes to investing, we play it a lot like most people play Monopoly, they just, you know, randomly pick up properties without getting a monopoly and it’s just a matter of time before they are thrown out of the game and I’m very keen on investing in monopolies when I can find them.
Steven Halpern: Now, you note that monopolies are difficult to find in America, but, again, I assume because of regulations, but there are plenty of them in international markets. Could you explain that?
Carl Delfeld: Well, you know, international markets and especially emerging markets, they’re just—there’s a lighter regulatory hand and there’s a lot of tycoons who are very adept at being tied into the government and partnering with the government.
A very good example is Carlos Slim, who we all know from the Forbes billionaire list is the wealthiest man in the world, although he’s pulled back a little bit this year, but he really built his fortune on the back of Mexican Telecom monopolies and as they say in a recent article as a hobby, he bails out the New York Times.
He’s enormously wealthy. Just think of this, if an American can do this. His companies control 80% of Mexico’s telephone lines, 70% of the cell phone market and believe this or not, 34% of the total value of Mexico’s entire stock market.
Now, he’s under a little bit of pressure right now to give some of that back, but, you know, the same sort of approach to a—in a diluted form—is used from great American investors from Getty to Buffett.
Steven Halpern: Now, you suggested that China Mobile (CHL) is a high profile monopoly that could be considered the poster child of state capitalism in China. Can you discuss the attraction of that stock?
Carl Delfeld: Sure, China Mobile is a monster and the government owns 70%, so here’s the situation where the government—it’s a highly regulated market, you know, the telecom business and when the government owns 70% of your company, basically, they listen to you, so China Mobile and the symbol there is CHL, New York Stock Exchange.
|pagebreak|We added that company to our portfolio in April and its up 33% since then, but I think it’s still a buy. The big attraction is its cash position. They’ve got $67 billion of cash on its books and that’s great for making acquisitions, pushing back competitors.
The other thing—big, big advantage—is it’s rolling out a 4G network across the country. They picked up 1.3 million users in one quarter and it’s also done a deal with Apple and so it’s selling the iPhone and they hope to sell 16 million iPhones by the end of the year and here’s the really cool thing:
The stock is trading—because China’s been off a little bit—it’s trading at about eight-to-nine times earnings and its book value is $32, so it’s not that far above book and then, for window dressing, so to speak, it’s got a dividend yield of 4.6%.
Steven Halpern: Now, another monopoly that you like is focused on Brazil and I’m not even going to attempt to say its name. I’ll let you do that, but it’s the largest water utility in Brazil. Can you tell us about this company?
Carl Delfeld: Sure, well I’m very keen on water and I’ve written in Forbes and otherwise, perhaps on your Web site that water is the new oil.
I’m convinced that—in the next couple of decades—instead of reading about oil prices all of the time, you’re going to be reading about water prices, so I’m not going to try to pronounce it either except to say that the symbol is (SBS), its trades on the New York Stock Exchange.
It’s the largest water utility in Brazil. It’s in Sao Paulo, which is the powerhouse of Brazil and it’s a monopoly, so there’s three attractions for SBS right now. One is that it’s got plenty of room to grow. Just imagine Sao Paulo has a population of 40 million and represents 30% of Brazil’s total economic output, so that’s a very nice monopoly to have.
Secondly, it has a great record. Over the last decade, its earnings per share have grown at a clip just under 20%. Now, and then the other thing is its pulled back 20% in the last month, so it’s a great time to look at it since it trades right at book value and only seven times trailing earnings.
And then lastly—sort of like China Mobile—the other thing that’s interesting about these monopolies is they, often times, have nice dividends and SBS offers a nice, safe 3.8% dividend yield.
So, my view—I don’t know—different people have different views about monopolies. I mean, I’d rather have the free market, but my view is that the more monopolies in your portfolio, the better.
Steven Halpern: Well, we appreciate you taking the time and for those who are listening, I will give it a try. The company you’ve been discussing with the symbol SBS is Companhia de Saneamento Basico and that trades on the New York Stock Exchange.
Carl Delfeld: Right, yeah very liquid stock.
Steven Halpern: Okay, well thank you very much for your time, today. We appreciate it.
