Esprit Holdings Limited is an investment holding company. The Company and its subsidiaries, is principally engaged in wholesale and retail distribution, and licensing of fashion and life-style products designed under its own Esprit brand name. The Company operates with 12 established product lines offering women's wear, men's wear, kid's wear, edc youth, as well as shoes and accessories in over 800 directly managed retail stores and over 14,000 controlled-space wholesale point-of-sales internationally. It licenses its trademark to third-party licensees that offer non-apparel products. Its subsidiaries include ESP Group Limited, Esprit Belgie Retail N.V., Esprit Belgie Wholesale N.V., Esprit Canada Distribution Limited, Esprit Canada Retail Limited, Esprit Canada Wholesale Inc., Esprit Capital Limited and Esprit Card Services GmbH.

Kumho Tire Co., Ltd. (SEO:073240) is a company traded on the Korean Stock Exchange that has not done a good job following a “wealth-creation strategy” of growing a profitable business over time as it has been unable to earn back its cost of capital (negative Economic Margins) since 2005. As you can see from the Wealth Creation Report below the market has punished Kumho for not earning a positive Economic Margin (true economic profitability) while growing out their asset base. The Applied Finance Group (AFG) believes that a company that is unable to earn back its cost of capital (negative EM) should focus on its core competencies and divest losers rather than continue to grow a negative profitability business.

In our July Market Review we released a series of graphs representing the valuation attractiveness of each sector relative to its historical norms and to the entire AFG universe. Below is a graph representing the AFG Technology sector which is attractively priced when you compare against its historical trading ranges (red line) and when comparing against the overall AFG Universe (represented by the value of 1). Listed are 5 attractive and 5 unattractive companies in the AFG Technology sector that are within the S&P 500. Also listed below the graph is an explanation of AFG’s Relative Valuation Chart.

The market rewards companies that follow a wealth creation strategy of growing a profitable business. In other words, the market favors companies that generate positive Economic Margins (true measure of economic profitability) and are capable of expanding their business. Li & Fung Limited (HKG:0494) has maintained positive Economic Margins for over the last 10 years, and has consistently grown their asset base during the same time period. Looking at the Cumulative Return vs. the Hang Seng Index chart in the Wealth Creation Report, it is not surprising that Li & Fung Limited (HKG:0494) has outperformed relative to the largest companies in the HK exchange over this time period.

In an extraordinary way, the August 21 Australia election resulted in a hung parliament, the first in the country since 1940. The latest counting suggests the Coalition and Labor have both won 73 seats, short of the 76 majority needed to govern. The Independents have won 3 seats, and the Greens won 1. Both the Coalition and Labor have started courting the non-party winners, and a new government is likely to be formed in 1 week. While the 3 Independents have previous ties with Nationals, a partner of the Coalition, the candidates claim they don’t guarantee support for the Coalition. Considering the dominant lead Labor had just 1 month ago when the Prime Minister set the election date, the “draw” Labor has to deal with now is rather astonishing, regardless if it will be able to woo Independents and stay in power. A ruling party overseeing a booming economy is on the brink of losing re-election – that is Al Gore-esque. This election is crucial, as we wrote in our July Monthly Market Review. Labor’s agenda – including pursuing a new wind-fall profit tax on the iron ore and coal resource firms, will make Australia less investor friendly in the long run. In addition, Labor’s stepped up government spending programs – specifically the proposal to build a National Broadband Network which promises to provide fiber optic cable to Australian residents in 8 years at an estimated cost $43 Billion AUD ($39 Billion USD), will possibly lead to higher interest rates and a crowding out of private spending in what appears to be an overheating economy. Therefore, a Labor victory will likely result in lower Economic Margins for all firms, and subsequently lower valuations and multiples for traded firms, and reduced overall growth for Australia. For US investors, this will ultimately translate into lower Australian strategic allocations for funds invested internationally.