Donald Trump’s surprising victory on Nov. 8 has generated quite the stock market reaction. U.S. stocks initially sold off sharply, but have subsequently advanced as investors reconsider Trump’s economic plans.
However, Trump’s impact on Mexican stocks has been far more severe. Following news of Trump’s victory, the Peso sold off by more than 10%, falling to new all-time lows. It rallied back somewhat the following day, but that rally quickly dissipated. The Peso is now plunging to new depths as analysts suggest that Mexico is heading for a recession.
But those negative opinions may be a bit much. I’ve long held the view that Trump is talking loudly, but will be more diplomatic in his actions. In short, I doubt there will be a wall. I expect the U.S. will eventually put in place modest regulations with Mexico rather than repealing the North American Free Trade Agreement outright. If so, Mexican stocks are potentially a real steal at current levels.
The Mexican market — in U.S. dollar terms — fell sharply on Wednesday, and dropped another 8.5% on top of that Thursday. Across the board, Mexican ADRs have been whacked for 10 to 20% two-day losses. Much of that loss is due to the Peso, Mexican shares lose value as the Peso declines, and will regain value as the Peso recovers.
The Peso has now dropped from 14 to 21 to the dollar over the last several years. This is despite a lack of any meaningful inflation. And Mexico continues its disciplined government spending and sound central banking approach. The Peso has crashed due to negative foreign sentiment, but the economic conditions don’t justify the panicking.
Beyond the currency losses, Mexican stocks have also given up ground, as people fear Trump’s election will lead to a recession. This may or may not be the case. However many of the Mexican stocks getting pummeled are rather recession-proof; the sell-offs aren’t justified, even if the worst fears about Trump are true.
Here are three Mexican stocks to buy and one you should avoid.
The Mexican Stock You Should Sell: Cemex SAB de CV (ADR) (CX)
Before getting to the stocks I’m a buyer of here, I’m going to mention one hot trade I don’t advise. I’ve seen several folks suggesting that you should buy Mexican cement maker Cemex SAB de CV (ADR) (NYSE:CX).
Some investors consider this a sound choice because they believe Trump’s proposed border wall will require a vast amount of cement, and Cemex is the most logical provider. But even if the wall is built, there’s no guarantee that CX would get the contract.
Furthermore, the uncertainty caused by Trump’s win will likely curtail capital investment in Mexico over the next year. This would greatly reduce cement demand elsewhere in the country. Cemex is one of those fun-sounding trades — invest in the wall! — that doesn’t actually work in practice.
However, what I am a buyer of are defensive or tourism-focused companies.
Mexican Stocks to Buy: Coca-Cola FEMSA, S.A.B. de C.V. (ADR) (KOF)
The first Mexican stock on my to-buy list is Coca-Cola FEMSA, S.A.B. de C.V. (ADR) (NYSE:KOF). Femsa is Mexico’s leading bottler of The Coca-Cola Co‘s (NYSE:KO) beverages. In addition, it is a leading Coca-Cola partner in various South American countries.
KOF bottles much more than just sugared sodas. It also has strong brand positions within bottled water and juices. Furthermore, it’s important to consider that soft drink related health concerns haven’t made it to Latin America yet; soda consumption trends are much stronger south of the border. KOF stock is down 11% since Trump’s victory.
Remember that the company’s products are recession-proof and that much of its business occurs outside of Mexico. As such, the move in the stock seems to be a brutal overreaction. Your average soft drink buyer simply doesn’t care about the status of U.S.-Mexican trade relations. KOF stock owners thinking about the long-term shouldn’t be worried either. The company traditionally hasn’t been a high yielder, but the sell-off now leaves it paying an almost 3% dividend.
Ultimately, KOF stock should work because people will keep buying Coca-Cola and bottled water regardless of political developments.
Mexican Stocks to Buy: Fomento Economico Mexicano SAB (ADR) (FMX)
On a related note, the next Mexican stock I’d recommend is Fomento Economico Mexicano SAB (ADR) (NYSE:FMX). Fomento comes with three strong assets. It is the largest shareholder of KOF stock and it owns a 20% stake in brewing giant Heineken N.V. (ADR) (OTCMKTS:HINKY). It earned this stake in return for selling its Mexican brewing operations years ago.
If you want to invest in beer, but can’t stomach the price-to-earnings ratios for the big brewers, FMX stock is a great back-door method to get exposure to beer. And FMX stock just got much cheaper, thanks to Trump, plunging 9.6%.
In addition to that holding, Fomento carries a more active asset: It controls Mexico’s omnipresent OXXO convenience store chain. With more than 2,000 locations, OXXO dominates the market, offering food and drinks in virtually every Mexican town.
On top of that, OXXO serves as a financial institution for Mexico’s lower class, offering money transfers, bill pay and even some banking services to its clients. OXXO is now discussing expanding into Hispanic regions of the U.S., in order to expand its financial services arm. This offers the potential to do more in high margin areas such as remittances.
Overall, FMX stock is solid choice. You can buy into Heineken at a nice discount and also get Mexico’s most important small-footprint retail chain.
Mexican Stocks to Buy: Grupo Aeroportr dl Pcfco SAB de CV (ADR) (PAC)
Finally, let’s discuss a tourism-focused name. Mexico, in one of its moves toward deregulation and promoting a free market, sold off its public airports. These publicly traded companies in turn pay virtually all their profits out as dividends, making them into de facto real estate investment trusts.
The appeal of airports should be clear: With the Mexican Peso in freefall, tourist dollars stretch farther, compared to other countries near the U.S. For people with dollars, Mexico has never been this affordable. Even before Trump’s win, the rapid decline in the Peso was promoting a tourism boom. U.S. airlines have been adding Mexican capacity at unprecedented rates.
Which brings us to Grupo Aeroportr dl Pcfco SAB de CV (ADR) (NYSE:PAC). This airport operator holds operating leases for 12 Mexican airports. Its flagship airport is Guadalajara, the Chicago-sized city that serves as Mexico’s most important economic engine apart from the national capital.
Next up is Tijuana, a booming airport along the California border. Over the last year, a new cross-border pedestrian bridge opened. It allows fliers to land in Tijuana and exit the airport in San Diego, all without ever setting foot on Mexican soil. This has been a boon for traffic, with Tijuana passenger arrivals up more than 30% over the last year. Due to overcapacity at San Diego’s airport, most new routes to the metro area land at Tijuana now, including the first direct China-Tijuana/San Diego area flight served by Grupo Aeromexico SAB de CV (OTCMKTS:GRPAF).
Furthermore, PAC stock is supported by a few tourism-dominated airports. These include, most notably, Puerto Vallarta and Cabos. Both of these airports are booming as international arrivals pick up steam.
Airports generate profits in several ways: They collect landing fees on every passenger, rental charges from airlines, a portion of sales at the airport’s shops and restaurants and parking fees, among other things. As an added kicker, foreigners tend to spend more at the airport’s retail establishments when the exchange rate improves. PAC grew revenues at a double-digit rate last year and pays a near-5% dividend.
Revenue growth should pick up further as the Peso declines. Should Trump’s efforts cause more of a selloff in the Peso, tourism will surge to record levels, giving the airports and PAC stock a massive tailwind.
Ian Bezek lives in Queretaro, Mexico. At the time of this writing, he owned KOF stock, PAC stock and FMX stock. You can reach him on Twitter at @irbezek.