A Great Conservative Growth Stock

Heaven Is …

Switzerland Is …

A Great Conservative Growth Stock

According to the Internet, Heaven is where the police are British, the cooks French, the mechanics German, the lovers Italian, and it is all organized and run by the Swiss.

Contrarily, Hell is where the police are German, the cooks British, the mechanics French, the lovers Swiss, and it is all organized and run by the Italians.

Stereotypes, sure, but having just returned from a week in Switzerland, I can vouch for the punctuality of that country’s systems. I rode on 14 trains while there, and every one was as punctual as their legendary Swiss watches.

My most prosaic train ride was the quick hop from the airport (where the luggage carts are adapted to ride on escalators!) into Zurich.

My first “exciting” train ride was the Gornergratbahn, which took me and my German friend Gunter from Zermatt up to the height of 3,089 meters (10,134 feet) in the shadow of the Matterhorn. The Gornergratbahn is the highest open-air railway in Europe, and our ascent marked the start of the best day of skiing in my life.

As it was Tuesday, there were no crowds. The sky was sunny. The temperature was the best you can expect for the Alps in January, hovering near freezing at mid-day. And the snow was wonderful, with packed powder on the marked trails, and a few inches of new powder on a firm base off the trails.

Tim Switzerland

But the ultimate train ride came two days later when our wives joined us for the ride up to the “Top of Europe,” the Jungfraujoch. That’s the saddle that lies at 3454 meters (11,333 feet) between the Jungfrau (the Virgin) and the Monch (the Monk), who protects her from the spectacular Eiger (the Ogre).

This track was completed in 1912, after 16 years of work … which included the accidental explosion of 30 tons of dynamite in 1908. The main difficulty came not so much from the elevation but from the fact that the final seven kilometers (four and three-quarters miles) of track were cut through the solid rock (limestone and gneiss) of the Eiger and the Monch.

Also difficult, as with many such projects, was fund-raising. Luckily, as the railroad was completed in stages, its investors could generate income by selling tickets to the intermediate levels.

The ride to the “Top of Europe” is an expensive ticket today—about $170—but on a clear day, there’s no better view in Europe. You can see Italy, France and Germany, as well as the glaciers at your feet, which recede a little more each summer. You can walk outside on the snow, eat at a restaurant and visit the Ice Palace, where the floors, walls and ceiling are solid ice, and you can view a variety of ice sculptures, including this guy.

Tim Switzerland

If you’re puzzled, ask your kids.

And, of course, you can buy a Swiss watch, to ensure that you catch the train down on time.

Economically, Switzerland is an interesting place.

It sits at the geographic heart of Europe, but it doesn’t use the euro, preferring instead to stick with the Swiss Franc … which means that as the value of the euro has fallen in recent months, life for travelers to Switzerland has been become even more expensive, relatively.

Famously neutral, the country hasn’t fought a war since 1847. Its defense budget is less than 1% of GDP. The U.S.’s is more than 4%.

Its electrical adapters are different from the European standard.

The colors of its highway signs are different from the European standard.

Agriculture is subsidized, so the country can feed itself.

Cars and fuel are expensive, so many people ride bicycles, even in January.

The public transportation network is a model of efficiency.

Per capita income is the eighth-highest in the world.

And the country is clean.

But none of this would be possible without the revenue generated by the deposits in those famously secretive Swiss banks, which may hold as much as 33% of the world’s offshore investments and contribute nearly 12% of Switzerland’s GDP.

And there’s no certainty those assets will remain in Switzerland, as a global trend toward growing transparency—thanks in part to Wikileaks—makes large-scale criminal activity (including tax evasion) more difficult, and as Singapore develops into a strong competitor in the offshore banking business, particularly from Asian parties.

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Still there are opportunities for investors in Switzerland.

Which brings me to this issue’s recommendation.

It’s pharmaceutical giant Novartis (NVS), which is headquartered in Basel, Switzerland, but does business in 140 countries all over the world. Created in 1996 from the merger of Ciba-Geigy and Sandoz, the company generated $51 billion in revenues last year. Its biggest market was the U.S., accounting for 32% of revenues. Its biggest revenue-generators included Gleevec, Diovan, Lucentis, Amoxicillin, Augmentin, Claritin, and Excedrin. And it’s growing at a good pace, in large part by acquiring smaller competitors with valuable properties. Last year it acquired eye care giant Alcon.

In the fourth quarter of 2010, Novartis saw revenues grow 10% from the year before, to $14.5 billion. Profit margins were 18.7%. And the dividend yield was a solid 3.0%.

It’s not a hot stock; NVS is owned by some 600 mutual funds, most of which are in for the long haul. But it is decently valued.

In fact, the latest issue of Cabot Benjamin Graham Value Letter says that the stock, currently trading at 56, can be bought anywhere under 55 … buying low gets you a Margin of Safety. And it can be held until at least 72.90, above which it will be overvalued and therefore carry excessive risk.

I think it’s a good choice for conservative growth investors who like the stability of some income from dividends.

For more, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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