Taking a trip south of the U.S. border is often a dubious rite of passage, but soon enough, Mexico may be known as an investment hotspot. Year-to-date, the Dow Jones Mexico Index is up 6%, comparing very favorably against our own S&P 500, which is basically flat for the year.
It also has a slight leg up against the steadily moving Canadian markets, at 5% YTD. Simply put, Mexican stocks represent a better opportunity for those who want more than just breaking even.
First and foremost, the economic relationship that we have with Mexico is staggering. According to the U.S. Department of State, the border regions shared by the U.S. and Mexico have a combined population of almost 100 million people. Were it its own country, this region would have the world’s fourth largest economy.
To put that into perspective, this theoretical nation would unseat Germany, France and the U.K. from their current ranking. The proximity of such a powerhouse relationship is a net positive for both Mexican stocks and American businesses.
Furthermore, Mexico is a favorite destination for investment dollars among major multinational corporations. While there are many advantages of doing business in Mexico, one significant factor is the demographic. Twenty-five to 54 years old make up the largest segment of the country’s population — essentially, prime working age.
Better yet, the second-largest segment are those aged 0 to 14 years, which represent nearly 28% of the population. Mexico carries a mostly young, dynamic labor force, which is generally long-term bullish for Mexican stocks.
Finally, there are recent indications that the peso is stabilizing, providing much appreciated support for Mexico’s consumer base. Thanks to government endorsed measures, the peso has been among the top performing currencies over the past month, helping to scale back previously rising inflation rates. Should the peso maintain its current footing — and the trend suggests that this is more than possible — Mexico’s central bank will simply match any policy decisions made by the U.S. Federal Reserve.
All told, Mexican stocks enjoy a wide range of near-term and forward-looking fundamentals that should position them higher in the financial markets. If anything, the lackluster returns of American companies are forcing more eyes abroad. That said, here are three Mexican stocks that will add some spice to your portfolio!
Mexican Stocks to Buy: iShares MSCI Mexico Inv. Mt. Idx. (ETF) (EWW)
Unlike so many ETFs that cover various emerging markets, the EWW is not overwhelmingly levered toward energy or commodities. Instead, the EWW covers a much broader spectrum and is, for the most part, evenly distributed among different investment sectors.
While this may not catch as much of the upswing when commodities and energy are soaring, it also helps to mitigate the volatility inherent in those industries.
Another aspect to the EWW that is favorable is timing. While the U.S. markets enjoyed a record outing in 2015, Mexican stocks veritably collapsed, with the EWW absorbing a 12% loss. In fact, Mexican stocks suffered three consecutive years of negative returns.
In and of itself, this doesn’t necessarily mean anything. It’s a much easier case, however, to argue that Mexican stocks are undervalued and have more room to run, as opposed to American markets that appear to have expended most of their energy.
Indeed, the EWW enjoys several fundamental tailwinds that should help carry it to previous highs. The stronger peso will bolster Mexico’s financial sector and individual Mexicans’ purchasing power. Additionally, with oil accounting for 13% of the country’s exports, the recent run-up in the Brent Crude Oil Index should be a solid bonus for energy-related Mexican stocks. Finally, Americans are ravenous consumers of Mexican products.
When it comes to international investing, some people have a tendency of thinking too exotically. As the EWW ETF demonstrates, all we have to do is look south toward Mexican stocks.
Mexican Stocks to Buy: Cemex SAB de CV (ADR) (CX)
CX is poised not only to be a standout company among Mexican stocks, it could very well be one of the top names anywhere. Thanks to a series of solid fundamentals, CX is up 28% YTD, and continues to impress in the markets. Cemex is up 16% just in the past week, helping to push the EWW ETF, which lists CX stock as a significant portion of its holdings.
For those that might be worried that the Cemex rally is unsustainable, consider that CX jumped in the markets after it posted its fourth quarter of fiscal year 2015 results. Against a consensus earnings forecast of three cents in the red, CX instead surprised everyone by pulling a seven cent profit. This also meant a net profit for the year, which is a first for the long-embattled company since 2009.
Several factors contribute to the Cemex earnings beat. Primarily, management pursued an aggressive pricing strategy that eschewed revenue in favor of profitability. It was a gamble considering the negative impact to market share, but one that has so far paid off handsomely.
Second, Cemex focused its efforts on its biggest buyer — the U.S. While sales in other markets took a hit, CX revenue north of the border moved up nearly 5% in Q4.
Finally, CX has been offloading some of its assets to clean up its balance sheet. A leaner, meaner Cemex should be better able to advantage the broader tailwinds lifting Mexican stocks.
Left for dead in the aftermath of the global financial crisis, Cemex in many ways embodies the proud, fighting spirit of the Mexican people. Because of this never-say-die attitude, CX is on its way to being the rebound king of 2016.
Mexican Stocks to Buy: Fomento Economico Mexicano SAB (ADR) (FMX)
Click to Enlarge Among the featured Mexican stocks, Femsa (FMX) is the laggard, which has only managed to break even on a YTD basis. Nevertheless, FMX could turn out to be a solid investment over the longer-term picture.
The beverage and convenience store company — best known for its distribution of Coca Cola (KO) branded products — became the most weighted stock in the Mexican markets last November. Due to steady expansion efforts, Femsa is likely to break out of its current consolidation pattern and resume its upward progress.
For now, the markets are still trying to feel out the implications of Femsa’s Q4 FY2015 earnings report, which missed consensus estimates by roughly 13%. Profitability margins for FMX were worse than expected at the company’s gas station stores and for its holdings of Heineken N.V. (HINKY). In contrast, FMX sales at its Oxxo branded chain — which is more than 14,000 store units strong — jumped nearly 9%. Overall, total revenue in Q4 leaped 27.5% year-over-year.
Moving forward, the broad drivers pushing Mexican stocks are sure to positively impact FMX. The aforementioned stability in the peso should benefit FMX considerably. Recall that in our own markets, the sharp drop in gas prices resulted in increased spending for small, discretionary items — not so much for large scale purchases.
Currency dynamics also point toward dollar weakness, further bolstering the bull case for the peso. Coincidentally, FMX stock is currently trading at only seven-times forward earnings.
FMX has come down a bit from its previous highs, but positive tailwinds should help this Mexican titan regain its former glory
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.