Brazil: Non-Commodity Stocks Offer an Excellent Entry Point

If I was money on the sidelines, I sure know where I'd be heading Thursday. Mardi Gras, anyone?

With commodities markets selling off hard on Wednesday, commodity rich countries took major hits. Russia, in my opinion, has risen with oil despite major weakness in all other sectors. Brazil is a different story. Overal production and consumption grew in 2008 and have continued in 2009, not to mention a world leading resource portfolio.

Wednesday, partially on profit taking due to recent gains, Brazilian consumer and utility ADRs sold off hard, resulting in an average drop of 5% in each of my three favorite Brazil plays. I don't look to this top 10 world economy for oil and gold; Canada (both) and South Africa (gold) are cheaper ways to play commodities. The balance sheets are good, the yields are even better and now the price is right:

1. Companhia de Saneamento Basico do Estado de Sao Paulo (SBS): I just can't get over the ridiculously low valuation for the leading water supplier of the largest city in such a competitive, growing country. Buying now does mean just missing one of two annual dividends, however a trailing PE of 7 and a valuation under 3/4 book value make this my favorite stock, period.
2. Market Vectors Brazil Small-Cap ETF (BRF): There is surely some downside with this new ETF, but Brazil's economic growth is underway and small-cap exposure in a real emerging market deserves a healthy risk premium. Dividends should grow with this consumer index and I see big potential here as a multiple year holding.
3. CPFL Energia (CPL): This power utility has a very strong history of returning profits to shareholders, about $11/share in the last three years. The company grew profits 6.5% year-over-year in the first quarter in 2009 and boasts some of the best margins in the power business.

Disclosure: Long SBS, CPL

Comments

[Globel E:]

SBS has one other characteristic of interest - not only are they involved with water supply, they are involved with wastewater disposal. Nice combination in rapidly growing urban circumstances.

Jun 04 10:30 AM

[Paul Harper:]

with Moodys upgrading Brazil to investment grade & the latest energy deals with China, I am long term bullish on Brazil.
Good to see someone digging through the usual EWZ & PBR and loking for real value.

Jun 06 02:36 AM