When I look for investing opportunities outside the U.S., Brazil is at the top of my list. I spent 10 years working and investing in Latin America because of my involvement in ventures to start AOL Latin America, and I like it for several reasons.
Its currency (the real) has been beaten down so far that it can only go up. In late summer, the central bank intervened to stop the slide, and the real has gained in value since then. At the same time, the iShares MSCI Brazil Capped Index Fund (EWZ), one of the main ETFs tracking Brazil, has bounced about 20%.
In addition, Brazil already has a powerful middle class that continues to grow. The country is rich in natural resources, for which demand should pick up as the global economy strengthens. Plus, it will host two major events in the next few years: the 2014 World Cup and 2016 Summer Olympics. These are the world’s two biggest sporting events, and I look for them to put Brazil on the world map the same way the Beijing Olympics displayed China’s modernity and ingenuity in 2008.
I can tell you from my firsthand experience that no other country in Latin America compares to Brazil’s innovation and work ethic.
In terms of specific plays, here are four that interest me as longer-term opportunities to benefit from the growing middle class:
Itau Unibanco (ITUB): A lot of investors have never heard of Itau because it’s headquartered in Brazil, but it’s one of the world’s largest financial institutions. With 5,000 branches, 100,000 employees and nearly $500 billion in assets (yes, half a trillion!), ITUB is not just the largest Latin American bank, it is one of the biggest in the world. With proven dominance in Brazil (and Latin America), Itau Unibanco is a go-to financial pick, and it currently yields an attractive 3.5%. I recently recommended that my Inner Circle readers sell ITUB on a nice bounce due to the risk of near-term weakness on economic data out of China, but I’m already looking for an opportunity to get back in.
Companhia de Bebidas das Americas (ABV): Better known as Ambev, it is one of the largest brewers in the world and the largest in Latin America (in terms of sales volume). It makes a variety of beverages, including beer and soft drinks, and is also one of the biggest independent PepsiCo bottlers in the world. The company has done a good job lately of emphasizing premium beers, which carry a higher margin, to offset recent lower sales volumes. ABV yields a solid 4.6%.
Brasil Foods SA (BRF) is South America’s largest food processing company, involved in everything from meat and dairy products to pasta, frozen vegetables and soybean-related products. The company has been around since 1939, and Forbes ranked it 39th on its list of the world’s most innovative companies. It brings in about $13 billion in sales each year, and analysts are estimating that earnings will grow from 94 cents per share in 2012 to $1.94 for all of 2013, with additional growth to $2.78 in 2014.
Mercadolibre (MELI): The name of the company is Spanish for “free market,” and I think of MELI as the eBay (EBAY) of Latin America. Online shopping is growing at a faster rate in Latin America as the middle class continues to grow, and Brazil is one of the hot spots. Ecommerce in Brazil reached $17 billion in 2012, according to eMarketer, and that number is expected to jump to $29 billion by the end of 2017 as smartphone usage increases and more people access the Internet. Mercadolibre operates ecommerce sites where items are sold either through auction or a fixed price. MELI also has an electronic payment business called MercadoPago, similar to eBay’s PayPal, which can be used on MELI’s sites as well as for payments elsewhere. We took profits in it earlier this year in my GameChangers newsletter, but I continue to watch it closely and like its long-term potential.
Brazil’s had its struggles in 2013, but the surging middle class will push the country’s economy to new heights. If you’re smart enough to get into these stocks now, it can do the same for you.
Hilary Kramer is the editor of GameChangers.