Is it finally time to buy Vale?


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Brazilian equities have been hammered on the back of both a general risk-off trade in global equities stemming from the European crisis as well as structural problems in the Brazilian economy. As a result of the sell-off, some equities look cheap here ; in particular, Brazilian iron ore giant Vale ( quote ) has a compelling valuation and positive macroeconomic catalysts that could push tis beaten down stock higher.

Image: Agencia Vale Like most large-cap Brazilian stocks, Vale has suffered due to Brazilian government interference . Like Petrobras ( PBR , quote ), Vale has borne the brunt of Dilma Rousseff's policies designed to help the economy grow and the middle class prosper, as there have been significant repercussions for large corporations in the country.

That being said, there is no risk of Argentinian-style nationalization for Vale. The Brazilian government may have no qualms with placing restrictions on Brazilian multinationals, but Dilma's administration is cognizant of the ramifications that nationalization would have on foreign direct investment.

Vale's current price reflects substantial trepidation that the government will further hinder the company's progress. While the government is indeed inclined to intervene, the company's valuation is simply too great to ignore.

In an interview yesterday, Will Landers, head of BlackRock's Latin American fund, informed viewers that Vale was the company's best pick in Brazil . Vale stands to benefit from a weakened real, and fresh Chinese stimulus will likely see global demand for iron ore perk up.

Landers also indicated that increased profits will likely lead to more cash being returned to shareholders.

Trading at a paltry 4.82 times forward earnings, Vale's current valuation is quite compelling in and of itself. Combined with the abovementioned favorable trends, Vale looks like a good bet going forward.

Leaps look particularly attractive here, given the potential for further downside in the near future as European woes continue to hinder Brazilian markets. January 2013 calls at the 20 strike price are currently trading at $1.30 apiece. Although employing options instead of purchasing the underlying equity will not give investors exposure to a potential dividend increase, this strategy would afford investors the opportunity to profit from substantial appreciation in the stock while committing a limited amount of capital.

Disclosure: Author may start a position in VALE within the next 72 hours


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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