Why Multi-National Corporations Are Behind The Trans Pacific Partnership Trade Agreement

 

The Trans Pacific Partnership (TPP). What is it? How does it affect me?

Those are important questions. I expect the TPP to modestly help the stock prices of multi-national corporations over the long-term; and to harm American-focused corporations, American consumers, jobs, and state & municipal budgets. Since Goodfellow LLC is a stock market website, I’ll  discuss the stock market angle here.

 

WHAT IS A MULTI-NATIONAL CORPORATION?

Multi-national corporations are companies which have offices, facilities, and assets in a variety of countries around the globe. Examples of such companies include General Electric, PepsiCo, and Procter & Gamble.

 

HOW DO MULTI-NATIONAL CORPORATIONS BENEFIT FROM THE TPP?

The multi-nationals are looking for additional consumers to buy their products. If they increase their sales, they will increase their profits.

 

BUT THESE COMPANIES ARE ALREADY MAKING MONEY HAND OVER FIST!

Yes, they are. But that doesn’t make stock prices go up. As a stock market expert whose model portfolios consistently beat the U.S. stock market averages, I know exactly what makes stock prices go up: increasing profits.

In the investment world, it is not enough for a public company to make a profit. Simply put, a public company needs to make more profit this year than it made last year. Otherwise, its stock price will languish.

 

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EXAMPLES OF PROFIT OUTLOOKS AT MULTI-NATIONAL CORPORATIONS:

                               Expected EPS Growth *            Int’l sales as a 

Company                  2015   2016   2017                 % of total sales

 

General Electric       4.8%   5.2%   3.8%                          57%

McDonald’s Corp.    2.5%   7.7%   8.8%                          62%

PepsiCo, Inc.            0.4%   8.4%   8.3%                          48%

Procter & Gamble   (5.5%)  7.5%   8.6%                          66%

Wal-Mart Stores      (3.0%)  5.7%   5.0%                          32%

* EPS (earnings per share) growth figures are derived from current Wall Street consensus estimates, as of April 13, 2015, provided by Morgan Stanley.

 

Well, those numbers look okay, right? After all, they’re rising.

Not so fast. Put yourself in the shoes of the investor, who could be an individual person, like yourself, or an institutional portfolio manager for The Vanguard Group. You are deciding which stocks to buy.  Do you purchase the stock of a company in which annual profits are falling, profits are stagnant, profits are rising slowly, or profits are rising aggressively? As you can see, the answer is obvious: you pick the best companies, the companies which are projected to have the biggest profit increases. Bigger profit increases lead to bigger stock price growth.

How do I know this? Because increasing projected profits are the number one criteria I use in my stock selection strategy. And my strategy has resulted in ten of the 12 Goodfellow LLC model portfolios outperforming the U.S. stock market indices by margins of 50-100% and more. I rarely include big multi-national corporations in my model portfolios, because their earnings growth is usually slow. Instead, I include companies that are expected to grow earnings per share (EPS) in the double digits, for the next several years.

Investors’ buying activity pushes the share prices upward. If investors are repeatedly reaching for growth stocks, and ignoring big lumbering multi-national stocks, the multi-national stocks are going to languish. And that situation will never turn around unless the company’s profit outlook improves. Thus, their push into new markets via trade agreements.

Simply put, the multi-nationals are desperate for a way to make their stock prices go up. They’ve gotten too big to do it through sales to their existing customers. So they do it through share buybacks and spin-offs — both of which are artificial and temporary ways to boost a stock price. The only way to consistently boost a stock price over the longer term is to increase annual profits.

And that is why the multi-nationals are behind the Trans Pacific Partnership: they need more customers, so as to increase profits, which correlates with stock prices rising. Because if shareholders become impatient, waiting for their multi-national stock prices to rise, they will sell their stocks, in favor of growth stocks. And that selling pressure pushes the multi-national stock prices down.

 

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Send questions and comments to research@goodfellowllc.com.

Happy investing!

 

Crista Huff

President

Goodfellow LLC

 

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