Investors often overlook emerging market stocks, especially in times of uncertainty and volatility. The U.S. Federal Reserve began to raise interest rates in last year, incentivizing investors to put more money in U.S. treasuries. As a result, emerging market equities have suffered. However, these stocks can offer attractive opportunities for long-term growth as they benefit from their regions’ economic development and rising consumption. In 2023, emerging market stocks are undervalued, as they trade at a significant discount to their developed market peers, despite having higher earnings growth and dividend yields. These three have a foothold in emerging markets:
DHT Holdings (DHT)
A transportation network to get crude oil in and out of a country is vital for economic development. When a country imports crude, how the resource arrives will depend on the importer’s geographic location. Still, transportation via shipping or ‘oil tankers’ remains a popular mode of moving crude. DHT Holdings (NYSE:DHT) is a crude oil tanker company operating a fleet of 23 very large crude carriers (VLCCs). DHT has grown revenues in the high double-digits benefitting from strong demand for oil transportation, especially in Asian emerging markets. In the second quarter of 2023, DHT reported revenue of $153 million, up 53% year-over-year, and a net income of $57 million, up 471% year-over-year, representing a robust net profit margin of 37.5%.
Despite brewing tailwinds in the crude transportation market, the oil tanker company’s valuation is cheap. DHT’s ratio forward price-to-earnings is about 8.3x future earnings. Similarly, the company’s forward enterprise value-to-EBITDA trades at 5.6x projected EBITDA.
The reason why DHT is undervalued is two-fold. On the one hand, the company benefits from Chinese demand for crude as China’s economy reopens after the covid-19 pandemic. A significant portion of crude demand from China is being sourced from the Atlantic Ocean, which will likely increase transportation distances. On the other hand, there are signs shipping freight rates are moving upward after slumping in the first half of this year.
These positive trends and DHT’s valuation should make the company’s stock a buy for investors bullish on the freight market and medium-term crude oil demand. Lastly, the oil shipper maintains a high dividend yield of around 14% right now, which could appeal to patient income investors.
Ecopetrol S.A. (EC)
One of the best oil bets in emerging markets is Ecopetrol S.A. (NYSE:EC). It is a majority state-owned oil and gas company in Colombia and is the largest in the country. As of June 30, 2023, the company is producing about 728,000 barrels of oil equivalent per day and owns Colombia’s largest refinery and pipeline network. Although Ecopetrol was a prime beneficiary of higher oil prices in the past couple of years, the market shifted against the oil giant in 2023. In the second quarter of 2023, Ecopetrol reported a revenue of 34.3 trillion Colombian pesos (about $9 billion), down 21.3% year-over-year, and a net income of 4.1 trillion pesos (about $1 billion), down 61% year-over-year. The reason was related to oil price movements. In particular, oil prices plunged this year relatively to where they were after Russia invaded Ukraine in early 2022.
One of the main reasons Ecopetrol remains undervalued is its high dividend yield of 7.5%, supported by robust cash flow generation despite oil market headwinds. The company has been paying dividends since 2007 and has remained stable even during the pandemic. Moreover, the oil company’s price-to-earnings ratio is about 4.6x forward earnings. Though a crude market rebound is not infallible and depends on how the economic recovery takes form, for equity investors desiring to invest in a valuable oil company, now may be an auspicious moment.
Vale S.A. (VALE)
One of the largest mining companies in the world, Vale S.A. (NYSE:VALE), is the leading producer of iron ore, pellets, nickel, copper, and coal in emerging markets. The company operates in 30 countries across five continents with a market capitalization of over $22.8 billion. The company also produces fertilizers, cobalt, manganese, platinum group metals, gold, silver, and other metals.
This year, Vale’s shares have been battered by slower sales growth and volatile commodity prices. In the second quarter of 2023, Vale reported revenue of $9.67 billion, down 82.4% year-over-year, and a net income of $892 million, down more than 97% year-over-year. Net profit margins sat around 9.2%. The price of iron ore which has fallen more than 11% year-to-date, played a role in the company’s underperforming metrics.
Nonetheless, Vale has several growth catalysts that could drive its stock price higher shortly. First, for a company of this size and clout in its respective industry, its forward price-to-earnings ratio is low at 5.7x forward earnings. Second, the company could benefit from more robust global demand for iron ore and other metals, especially from China, as the country continues to reopen and pursues more infrastructure and industrial development plans.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
