OFFSHORE INVESTING

You might be using an Android phone like me or an Apple product. You might be very active on Facebook and Instagram or a frequent consumer of Kentucky Fried Chicken. Some of these companies are global in operation and have a presence in our lives locally and the truth is, you can own a stake in them just like you do here on the NSE. So, why not own a piece of Meta- Instagram & Facebook? Yum! Brands – KFC, Alphabet – Google Cloud & Google as part of your portfolio.

The US equities market has over 6000 companies listed on the NYSE: the biggest marketplace for investors worldwide and the Nasdaq stock exchange with companies ranging from large, medium, and small caps. Investors who buy stakes in listed businesses are compensated in dividends, distributed from a company’s earnings, and capital gain from appreciation in share price. Not all companies pay dividends; some reinvest their earnings into the business. Amazon and Meta’s platforms have never declared dividends on common stock while Microsoft and Apple Inc pay annual dividends.

Offshore investing offers diversification to different sectors not available in our local securities exchange: consumer goods and retail, healthcare- AI processes a vast amount of patient data and a better understanding of human genomics will be groundbreaking in personalizing healthcare and making diagnosis faster, technology companies, logistics, and renewable energy investment made possible by the push by both politics and policies. Diversification within the sectors, and dollar returns as a hedge against the depreciating shilling.

What metrics to look out for before investing;

1. Understanding any company's business model and prospects by investors is imperative. Does the company make money from the sale of goods or services? Advertising revenue is Alphabet’s and Meta’s crown Jewel, the French luxury giant LVMH- Louis Vuitton is its most important brand estimated to account for 60% of revenue, E-commerce giant: Amazon’s revenue is from online store, third party sellers services, and AWS.Hershey’s Creamery sells chocolates, and Philip Morris is in the business of tobacco.

2. Operating Margins Investors should look for businesses with better margins than their competitors and high barriers to entry. The secret is to find a masterpiece, a business with a unique service( Costco) culture or product that is equivalent to having a castle, an economic castle with lots of crocodiles and piranhas so competitors don’t come near the castle. Meta has the highest gross margin and Microsoft has the highest net profit margin of the five tech giants. Razor’s sharp thin margins are common in retail and Costco has the lowest net profit margin but has shared scale efficiencies: the company grows by giving back to the customers. Historic masterpieces include Geico, Apple, Costco, Google, H&R Bloc, IKEA, Starbucks, and Gillette.

3. Return on Invested Capital( ROIC) This is a very important financial metric to investors besides ROE which should be 15% in showing value creation. A clear sign of a company’s quality is its return on invested capital invested relative to its cost of capital. The spread between ROIC and the cost of capital provides insight into whether a company is generating value- Morgan Stanley. ROIC is calculated by dividing NOPAT- cash earnings independent of financing divided by capital invested. The higher the return the better.

4. Share Repurchase Program The repurchase of common stock decreases shareholders’ equity. Through the simple act of share repurchase, investors’ share of the company is increased by owning more and it only increases shareholders’ value if the price/ value equation is right. Apple Inc and Berkshire Hathaway have been repurchasing their shares back aggressively. Share repurchase is beneficial for sellers looking for liquidity and the remaining shareholders

5. Free Cash Flow is a non-GAAP financial indicator that provides additional perspective on the impact of acquiring property and equipment. Growth in free cash means more profit is being converted into actual cash and the company can invest in capital expenditure to maintain and grow the business.

6. Skin in the game The CEO, CFO, and higher management staff should own many shares in the business and have their wealth tied to the long-term performance of the business. Good managers allocate capital well and make the right acquisitions deals which eventually shows up in growth in earnings per share. As an investor, you want to invest in companies that are capital-light and put their money to work efficiently.

7. Debt/ Equity While financing by debt is a common way to raise capital too much debt threatens to bankrupt a business if it is unable to repay interest and principal when due. A company with a lower gearing ratio is what an investor should be investing in. Interest-bearing debt/ Total shareholders Equity

What brokerage companies can one use if they reside in? Kenya?

It is now easier to get exposure to offshore Markets. An investor who resides in Kenya can use interactive brokers, Hisa, and the Ndovu app. Some brokers offer fractional shares: portions of one share.

As an investor, you’re looking for businesses with low valuation and good economics.

Mbugua & Associates Consultants

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