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
) has a compelling valuation and positive macroeconomic catalysts
that could push tis beaten down stock higher.
Like most large-cap Brazilian stocks,
Vale has suffered due to Brazilian government
. Like Petrobras (
), 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
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