"Bolsa de Valores, Mercadorias & Futuros de Sao Paulo"
You may not know this Portuguese title. You may not even know it by
its shortened moniker, "The Bovespa." But you should. This is
because it is the equivalent of Wall Street for South America.
Indeed, the Brazilian stock market -- the Bovespa -- is now the
largest stock market in the entire Southern Hemisphere. And by
2035, it could well be one of the largest stock markets in the
world. [
See my predictions for the top 8 world economies by
2040
]
For a while, it looked like many investors missed out on a golden
opportunity. The Bovespa doubled in a matter of just two years.
But patience is a virtue, and for those that missed the stunning
upward move, a second chance has just arrived. The global stock
market rout dragged the Bovespa back down, not to the levels seen
in 2008, but well below the peaks hit in 2010.
.png)
This
index
may be down roughly 20% from the peak, but a host of great
Brazilian companies have taken an even deeper bruising. Here are
five Brazilian stocks and funds that trade in the United States
through American Depositary Receipts (ADRs). These investments have
long been on my wish list, but were too expensive. Not anymore...
1. Embraer (NYSE:
ERJ
)
Market Value : $4.76 billion
Fall from52-week high : 26%
The Brazilian maker of regional jets for global airlines and armed
services has long toiled in the shadow of industry leaders Boeing
(NYSE:
BA
) and Airbus. This shadow has proved a nice place to be. Embraer
has steadily built a head of steam behind those two titans,
morphing into one of Brazil's largest employers. Sales hit $2
billion for the first time in 2000, broke the $3 billion mark in
2004, the $5 billion mark in 2007 and could hit $6.5 billion by
next year.
Embraer doesn't go head-to-head with Boeing and Airbus on large
wide-body planes. Instead, a tight focus on smaller, single-aisle
planes has helped carve out a strong role with airlines looking to
serve short-haul routes.
JetBlue (Nasdaq:
JBLU
)
has been adding Embraer jets to its fleet to handle smaller markets
where the tried-and true Airbus 320 is just too large.
This stock isn't just a play on Brazil, North America and Europe.
At a recent ai show, Embraer landed new contracts to deliver planes
to Kenya, Indonesia and Kazakhstan. The aircraft maker is well on
its way to becoming a household name on every continent. Embraer's
backlog
of planes yet to be delivered stands at 1,003 as of the end of
June. The recent steady drop in Embraer's stock has pushed it down
to just 10 times projected 2012 profits.
2. Petrobras (NYSE:
PBR
)
Market Value : $173 billion
Fall from52-week high : 38%
This Brazilian oil giant has lost $100 billion in
market value
since March 2011. That's a lot of dough. The sell-off is the result
of a drop in oil prices, slightly stricter government policies
regarding oil and gas royalties, and recent moves to issue more
stock and debt to help fund business development. (Though the
company now vows to stop issuing any more equity.)
Indeed, this company has been sucking in cash for quite some time,
generating a cumulative $40 billion in
free cash flow
loss in just the past two years. Pretty soon, though, losses will
morph into outsized profits when the company's heavy investments to
tap massive offshore oil fields finally
bear
fruit. In 2007, 2008 and again in 2009, Petrobras discovered three
new offshore oil fields, known as Tupi, Jupiter, and
yet-to-be-named site off of the state of Sao Paolo.
It's the Tupi energy play that should pique your interest. It's the
largest new find of oil since the Kashagan oil field was discovered
in Kazakhstan in 2000 and instantly put Brazil's oil reserve base
on
par
with industry giant Norway. Tally up all of its fields, and
Petrobas' engineers estimate the country is sitting on more than 12
billion barrels of oil.
The recent sell-off has put
shares
of Petrobras deep into bargain territory, trading at just 7.3 times
projected 2011 profits and 1.2 times tangible
book value
.
3. CPFL Energia S.A. (NYSE:
CPL
)
Market Value : $12 billion
Fall from52-week high : 38%
Utility stocks and growth stocks are rarely mentioned in the same
sentence. Yet when it comes to Brazil, growth is everywhere. Even
this regional power provider is posting solid growth in tandem with
a fast-growing middle class. Sales grew from $8 billion at the end
of 2006 to $12 last year. Profit growth hasn't kept pace, largely
because the company is still investing heavily to expand capacity.
When those investments catch up, CPFL will finally be able to boost
its
dividend
, which has been stuck around $1.30 a share for each of the past
three years. That's good for a 5%
yield
now, and likely a higher
dividend yield
when the current capital spending program winds down.
4. Companhia Siderurgica Nacional (NYSE:
SID
)
Market Value : $14 billion
Fall from52-week high : 48%
Construction cranes dot the skyline of many major Latin American
cities as countries spruce-up their business districts to better
reflect their rising economies. Many of the buildings are being
built with Brazil's CSN, which is the continent's largest
standalone steel maker. Yet the global sell-off in steel stocks has
taken CSN down in sympathy, and shares now trade for roughly 40%
below the February 2008
IPO
price.
5. iShares MSCI Brazil Index (NYSE:
EWZ
)
Fall from
52-week high
: 24%
Instead of finding the right Brazilian stock, why not buy the whole
basket of them? This
exchange-traded fund (
ETF
)
carries a 0.6%
expense ratio
and eliminates company-specific risk while focusing on all the
major Brazilian industries, from agriculture to finance to retail.
The recent 24% drop just put this ETF into the "on sale" bin.
Risks to consider:
Emerging market stocks really take it on the chin when global
markets plunge, so any investment in Brazil now could turn sour if
the U.S. and European markets plunge to fresh lows.
Action to Take -->
Emerging markets such as Brazil have had great runs before, only to
see them eventually peter out. Yet the boom-and-bust cycles are a
thing of the past. Government finances are now much better managed
in terms of fiscal and
monetary policy
. It's unclear where Brazilian stocks will trade in this uncertain
economic environment, but it's completely clear that these are
great companies with fantastic long-term potential and are poised
to be worth lot more in five or 10 years.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.