With its industrial economy slowing, the peso taking a bath, and revenue declining due to lower oil prices, now would not seem to be a good time to even think about investing in Mexico.
But it would be foolish to overlook the second largest Latin American economy simply because its facing challenges.
Despite its industrial economy weakening in 2015, Mexico still managed to grow GDP by 2.5%. It was the strongest year in the last three as GDP grew just 2.3% in 2014 and 1.3% in 2013.
Like the United States, the services side of the economy has been on a roll. Services grew 3.3% in 2015.
The falling peso, while a dream for tourists traveling to Mexico, is a problem for anyone importing goods from the United States. Recently, the Mexican Central Bank executed a surprise rate increase to try and defend the peso. So far, it has worked as the decline has paused.
The biggest challenge is falling oil prices. It’s easy to forget that Mexico is a big energy producer though its state-owned oil company Pemex.
Pemex, like a lot of big oil companies, is cutting costs and investments. It has reduced its budget by $5.5 billion. Less revenue for Pemex means less revenue for the government as well. The government recently announced budget cuts equipment to 0.7% of GDP.
The good news is that the Mexican inflation rate is well below the Central Bank target of 3% and domestic consumer demand remains buoyant.
Additionally, analysts expect the Mexican economy to grow another 2.3% in 2016. With Brazil and Canada in a full-out recession, this is a bullish forecast.
Get Mexican Stocks While They’re Cheap
It’s always darkest before the dawn.
Mexican stocks have sold off big in the last year which means you can now get them at a discount. The Mexican ETF is trading near 6-year lows.
Most of the individual Mexican stocks which trade on the US exchanges have also taken a beating.
For those looking for exposure to Mexico, but don’t want to buy a Mexican company, there are ways to get a foothold into Mexico by buying American.
Sell offs present opportunities. The Mexican growth story is still intact. Now’s your chance to get in at a lower price. Even with the recent bounce off the lows, many of these stocks still have cheap fundamentals.
Three Ways to Invest in Mexico
1. Buy Mexican Companies That Trade on American Stock Exchanges
2. Buy American Companies That Do Business in Mexico
3. Buy the Mexican ETF
1. Buy Mexican
You can go to the source and actually invest in some of Mexico’s largest publicly traded companies by buying shares in Mexican companies which trade on the American stock exchanges.
Unfortunately, two of the largest companies, America Movil (AMX), Mexico’s largest telecommunications company, and Fomento Económico Mexicano, aka FEMSA (FMX), which is the parent of Coca-Cola Femsa, a Coke bottler, and owns OXXO, the largest convenience store chain in Mexico, are both Zacks Rank #5 (Strong Sells).
I would stay away from both of them until the earnings situation improves. Estimates were cut after their last earnings reports.
An interesting way to play Mexico’s improving economy, however, is through tourism.
For the first 11 months of 2015, international tourism rose 14.2% year over year. While a big portion of the travelers were Americans and Canadians, Colombians also increased their visits by 25.5% year over year.
In 2016, Mexico City expects 29.6 million tourists, up 1.7% from 2015.
How are most of these tourists arriving and getting around while inside Mexico? By flying.
In 2015, 85% of international travelers arrived by air.
You can invest in the growth of tourism and travel by owning one of the airport companies. There are 3 publicly traded airport firms. They each have different segments, and airports, around the country.
My favorite is Grupo Aeroportuario del Sureste (ASR), also known as ASUR.
ASUR owns the Cancun airport and 8 other airports in southeast Mexico, including the tourist hot spots of Cozumel and Huatulco, along with Merida, Villahermosa, Oaxaca, Veracruz, Tapachula and Minatitlan.
It also is a 50% JV partner in Aerostar Airport Holdings, LLC, which operates the Luis Munoz Marin International Airport in San Juan, Puerto Rico.
Cancun continues to be the driver in the company’s growth. The resorts keep opening in the Riviera Maya, driving continued volume.
Total passenger traffic for 2015 rose 12.9%, with domestic rising 13.5% and international jumping 12.4%. The domestic increase was seen at all of its airports, as the Mexican economy continued to grow. The international gains were primarily at the Cancun airport.
ASUR is not a cheap stock. It’s trading with a forward P/E of 22.8x. Shareholders are rewarded with a dividend, currently yielding 2.3%.
While growth has been strong in recent years, analysts expect earnings to rise just 0.7% in 2016 with a double digit rebound in 2017.
ASUR is a Zacks Rank #3 (Hold).
2. Buy American
Another way to play the Mexican growth is to buy American companies that are expanding their business in Mexico. There are a lot of consumers to tap.
One of those is Home Depot Inc. (HD).
Home Depot only entered the Mexican market in 2001 but it has quickly expanded to over 60 stores and 7,000 employees. Recently, Home Depot said it would open 5 new stores in Mexico in 2016.
Annual growth in Mexico has averaged 10% a year.
Home Depot is trading with a forward P/E of 20.3 which isn’t cheap but sales have been strong. Earnings are expected to grow 14% in 2016 and another 13% next year.
Home Depot is a Zacks Rank #3 (Hold).
Southwest Airlines (LUV) was an exclusively domestic airlines until it acquired AirTran in 2011 and integrated its international network, which included Mexico and the Caribbean. By 2014, Southwest was flying to Cancun, Los Cabos and Mexico City.
In 2015, it added Puerto Vallarta.
Southwest is cheap, with a forward P/E of 9.6. Earnings are forecast to rise 23% in 2016 as fuel remains low and travel demand continues to be high.
Southwest is a Zacks Rank #1 (Strong Buy).
3. Buy the Mexican ETF
If you want to skip all the problems of finding individual stocks, a good alternative is the iShares MSCI Mexico (EWW).
It trades with a hefty daily volume of 2.7 million shares and has a dividend yielding 2.4%.
You’ll get America Movil, which is its largest holding at 12.6%, and Femsa, which is the second largest in the ETF at 9.6%.
But you’ll also get a mix of Mexico’s other big companies like Cemex, the concrete manufacturer, Wal-mart de Mexico, and Bimbo, which is one of the largest baked goods food companies in North America.
I love their snack sized pound cakes and croissants, some of which are also available in convenience stores in the United States.
The Mexican ETF is off its lows, up 11% in the last month, but it’s still off of its 52-week high.
Look for Opportunities in Mexico
The Mexican middle class continues to grow which will create a lot of opportunities for both Mexican companies as well as American companies.
Home Depot isn’t the only American retailer opening up new stores in Mexico. Gap Inc. (GPS) opened seven Old Navy stores in Mexico City in October 2015.
Also in October 2015, Williams-Sonoma Inc. (WSM) opened 13 stores across Mexico City encompassing all of its major brands, including Pottery Barn, Pottery Barn Kids, PBTeen, Williams Sonoma and West Elm.
Restaurant chains are also moving in, so look for companies growing in Mexico including Starbucks and Buffalo Wild Wings.
The Mexican growth story has only just begun. When times are tough, that’s when a savvy investor should be looking to get in.
[The author of this article owns shares of FMX.]
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