Wriston’s Law
What’s in a symbol?
Fast Food Finance
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Walter Wriston (b. 1919, d. 2005) was a distinguished banker for most of his life. He headed up Citibank/Citicorp from 1967 until 1984. He chaired the Economic Policy Advisory Board from 1982 to 1989 and was reportedly offered the post of Secretary of the Treasury twice, but turned it down. He was also an Eagle Scout and received the Presidential Medal of Freedom, but that’s not really relevant.
Wriston was also something of a visionary about how the information revolution would change the world of business. He moved Citibank into the MasterCard operation in 1969, ultimately mailing out 20 million cards to consumers and losing $1 billion before the program generated a profit.
The trouble with MasterCard was that the usury laws in New York restricted the amount of interest Citi could charge its users, which meant that the double-digit inflation of the 1970s kept eating up the profits.
And here’s where his insight into info tech served him well. He saw that electronic fund transfers gave capital--both monetary and intellectual--the freedom to flow wherever it wanted. He even created a nice rule, which has now become known as Wriston’s Law.
It says: “Capital will flow where it is wanted and stay where it is well treated.”
The practical application of The Law (although Wriston was too self-effacing to call it that himself) was that he moved Citi’s credit card operations to South Dakota, which didn’t have a usury law. Many people think that this decision saved Citi.
Under Wriston’s leadership, Citicorp’s profit mushroomed from $145 million in 1970 to $890 million in 1984.
The application of The Law to China and the emerging markets is interesting. Capital obviously doesn’t care about the politics of the people who run countries. It will flee from a democracy to an authoritarian regime if the conditions there are better. That seems to be the case in China right now.
But if the rulers of the authoritarian regime interfere with the free market, which is what investors are still worried about in Russia, capital will fly away.
Capital likes different conditions for different purposes. A cheap yen attracted global capital to what was called the “yen carry trade.” That meant that people borrowed Japanese yen at relatively low Japanese interest rates and used it to buy a currency with a higher rate. Someone who borrowed yen at the effective rate of 0.0% in Japan, converted the money to U.S. dollars, bought U.S. Treasuries that paid 4.5% (back in the good old days) and leveraged the investment at 10:1, could achieve a 45% profit with relatively little risk. Of course if the currencies shifted their relative valuations, the investor could also get a brick to the head.
Ironically, the U.S. dollar is now the low-priced currency being used for the carry trade. How things change.
And capital always notices these changes.
Kurt Vonnegut, the late, great (and fairly cynical) fiction writer, actually incorporated a unique stock-picking system in his early book The Sirens of Titan. In the book, a character named Noel Constant builds a huge fortune by investing in stocks that he picks because their ticker symbols match the letters that form the words of the Bible. His first investment was a stock called International Nitrate. His last was Sonnyboy Oil, which he chose because “SO” formed the last word of Genesis 1:16.
International Nitrate and Sonnyboy Oil don’t exist, of course. IN is the symbol for Intermec, a tech company in Washington state. SO is the trading symbol of a Georgia energy company called Southern Company.
But the idea that symbols ought to have some kind of power is a popular notion. I imagine the number of parents and grandparents who buy lottery tickets based on their offspring’s birth dates is enormous. (Personally, I prefer the numbers that appear on the slips inside Chinese fortune cookies, but they haven’t produced the big win yet.)
I also haven’t bought any Procter & Gamble (PG), even though its trading symbol matches my initials. I’ve been tempted by Chipotle Mexican Grill (CMG), whose symbol happens to be my wife’s initials, but not because of that. Chipotle is just a good growth company.
Anyhow, I’ve been fascinated by the symbols that represent companies on stock tickers and I thought I’d do a little research and report my findings.
It turns out that companies can choose their own trading symbols, which should make for some interesting meetings around the Board of Directors’ table. Those thinking about listing on the Nasdaq can reserve up to three symbols up to two years in advance.
I would have thought that single-letter symbols would be hugely popular, but it turns out that there are seven single letters (H, I, J, P, U, W and Z) that aren’t in use. U used to be the symbol for U.S. Airways until its bankruptcy in 2002. Plus, for every single-letter symbol that represents a grand old company (F for Ford, K for Kellogg, X for U.S. Steel), there are others that aren’t that familiar. (What do you know about Eni SpA that trades under E, or the Realty Income Corp. that uses O?) C used to be Chrysler, now it’s Citigroup; Gillette used to have G, which now represents Genpact; Sears Roebuck was once R, but now R is Ryder System.
Some symbols just feel right. I’m sure Randgold Resources is quite happy to trade under GOLD, and AU is periodically correct for Anglogold Ashanti. But who decided that SXC Health Solutions was SXCI? And wasn’t there anyone to warn Tongxin International that TXIC was a little too close to toxic?
Your chosen stock can be FREE, HOT, HIT, BIG, BEST, REAL, or GOOD. It can be medical like MD, RX, or, in the spirit of overkill, MDRX. You can trade a CAT, DOG, COW or DEER, but not many other animals. You can even buy NFL or MLB. And I’m sure a sufficiently creative person could write a story using only stock symbols, as someone did with California vanity plates a few years back. But it won’t be me.
But on to a more serious topic, which is today’s stock pick.
It’s hard for growth investors like me to look outside the hyperactive world of growth stocks, but it does happen occasionally. And Yum! Brands (YUM), a Kentucky-based restaurant franchiser that specializes in quick-service food, is definitely catching my eye.
Yum! has nearly 38,000 restaurants in its various chains, including KFC, Pizza Hut and Long John Silvers. The company has gotten lots of ink about the popularity of its KFC brand in China, and that’s a big driver of continuing growth. As the editor of Cabot China & Emerging Markets Report, I’m always interested in companies that have built national presences in China, whether they’re Chinese-owned or not.
That growth is quietly impressive, with a recovery from the four quarters of declining revenue in 2009 (hardly a surprise) to six quarters of single-digit growth through Q2 2011 and then a 14% jump in Q3. Impressively, earnings increased steadily even during the 2009 slump, and the most-recent four quarters have shown gains of 26% (Q4 2010), 7%, 14% and 14% (Q3 2011).
Yum! took a huge haircut (40 in September 2008 to 22 in November), but has made steady progress since then. The stock surges and bases, but its corrections are generally mild. After a correction from 58 last July to a double bottom at 47 in August and October, the stock has pushed ahead to 63, establishing it as a clear choice for investors seeking steady growth and a little income in the form of a 1.8% forward dividend rate.
Except for an occasional bite of the chicken at KFC, I don’t visit the restaurants that are under the Yum! umbrella very often. But I know value when I see it, and Yum!, even with its current P/E ratio of 23, should continue to prove attractive to investors with longer-term investment horizons.
If you’d like to see more of the slightly more volatile stocks that represent some of the fasting growing markets in the world, you can check out Cabot China & Emerging Markets Report by clicking here.
Sincerely,
Paul Goodwin
Editor of Cabot China & Emerging Markets Report
