Brazil: The Only Market Worth Investing In

Wednesday on CNBC, Jim Rogers insisted that China and Brazil are the only BRIC countries worth investing in. Despite an election conducive to more capitalistic policy, India's ritualistic culture discourages competition, greed and other growth drivers. Russia is still in a newly liberated economic state, in which citizens have so much incentive to enjoy previously denied economic freedoms that they will make frivolous financial decisions until enough time passes or national policy encourages productivity and saving.

China's case is well documented and will not be rehashed here, as I believe Brazil is the only market worth investing in today. Brazil is the only nation with an immediate future of increased production and consumption. Unlike China, Brazil has provided more developed economies things they need, not things they want (sorry if I underestimate the value of your Pokemon cards, Playstations and Beanie Babies). The death of the American consumer only affects Brazil if it is a literal one, meaning Americans no longer need sugar, bananas or oil.

In June I recommended aggressively buying Brazil stocks after a commodities selloff hit the Brazil ADRs extremely hard. Still today, despite 300%+ YTD gains in CZZ, GOL and others, Brazil is by far the cheapest market out there. SBS, CPL and BRF are still my favorite fundamental ways to play booming consumption and infrastructure growth in South America's largest country, but bargain hunting is what I do and the Brazil ADR market is littered with stocks undervalued relative to international peers. The following are attractive, albeit less popular investments in what I consider the only real bull economy.

1. Brazil Fast Food Corp (BOBS.OB): Q209 revenues were profitably up 62% YOY. The Company sells Pizza Hut and KFC franchise licenses for $60,000 and collects 5% of total sales from each restaurant. The model is extremely supportive of increased profitability as long as revenue continues to grow. Recent growth is seemingly due to a Brazilian love affair with subpar pizza, but the real story will be The World Cup, The Olympics and millions of tourists averse to trying new food. With volume starting to pick up, this thinly traded stock is as good a candidate as I know to return 100%+ the rest of this year.

2. Navios Maritime Partners (NMM): This high-yielding MLP has been buying ships at bargain prices all year and, unlike many bulk dry shippers, seems to be actually using them. With a yield near 10% and a busy decade of importing and exporting ahead for Brazil, NMM is likely one of a few stocks Peter Schiff wouldn't yell at you for buying. Parent company Navios Maritime (NM) trades at a cheaper P/E and P/B but only yields 4-5%.

3. Braskem (BAK): This may be the stock that has performed the best since Rio de Janeiro was named host of the 2016 Olympics. I've been following BAK, a petrochemical company, for about 6 weeks and kicked myself for not buying at $9.50 when it first hit $11/share. Today it trades near $14/share and is up about 20% in the last week. Q2 was a record quarter with earnings over $2/share and, while Q3 forecasts are less rosy, refined oil consumption in Brazil has nowhere to go but up. I consider BAK a better investment than PBR because it is only dependent on domestic consumption, not international demand for oil. Any market pullbacks will hit BAK hard so this Brazil ADR is one I wouldn't rush into.

Disclosure: Long SBS

Comments

[tc1:]

Thank you, Danny, for another good article with investable ideas. Glad to hear mention of specific companies, and not just the same ol' really great funds to invest in-- EWZ and BRF.

Oct 09 11:19 AM

[Alan Young:]

The oversimplified, stereotyped portrayals of India, Russia and China almost made me gag. But I can't argue with the investment thesis here.

Oct 09 12:02 PM

[Danny Furman:]

I said nothing about China, but the generalizations I made have definitive economic impact. I am part Russian and envy India's traditional culture, so please do not confuse my generalising with stereotyping. Real capitalistic growth is not likely in Russia's near future and India's stock market is simply priced for unfathomable growth. Sorry if I was too abrasive.

Oct 09 12:15 PM

[ArtfulDodger:]

DF, very good run down. I have come to the same conclusions myself regarding the nations you mention.

The value of China is hotly debated. I fall on the invest side, and am long several stocks there.

Brazil is, however, a cinch from my point of view. Am long SBS & VALE, & also STD which stands to benefit from Brazil's growth.

I greatly appreciate your pointing out these other companies. Plan on looking them over.

Good work. It's greatly appreciated!

Oct 09 02:30 PM

[Paul Harper:]

Like this a lot, some very good points & oh look, we are not just discussing PBR & EWZ ad nauseam.
Another that I like right now is Gerdau / GDR, infrastructure play on both oil & Olympics requirements.
Might inspire myself to write something up this weekend.

Oct 09 02:59 PM

[Danny Furman:]

Thanks for the comments tc1, AD & Mr Harper.
Gerdau (GBB in The US) was the first Brazil stock I bought (in April around $6) and sold my shares a few months later up around 50%. At today's prices I like VALE better, but both are cheap on an international scale and figure to grow substantially in the coming years.
With regards to China, I've always been a believer. With today's valuations, however, I see China as a stock pickers market and Brazil as a market with many winners and very few losers. ABV (beer and soda) looks like another sure thing.

Oct 09 04:29 PM

[Bill Charles:]

Danny - I've been looking for Brazilian stocks for a while and have finally found them. Thank you for your write up on the stocks mentioned in your article. I bought a few of them yesterday, as I believe in Brazil and where the country is heading. Keep those articles coming.

Sincerely,

Bill Charles

Oct 10 10:54 AM

[sacking:]

Thanks for your comments. Just found your article as it was linked to my investments in BRF, EWZ and ILF. I haven't bought individual Brazilian stocks. Are they ADR on a US market or only listed on the Brazilian exchange?
Thanks again for your insights. Go Brazil.

Oct 12 01:34 PM

[Danny Furman:]

All the stocks I mentioned are listed on major US exchanges (except BOBS, an "over the counter" stock). Well done with your ETF investments!

Oct 12 04:04 PM

[Meltdownman:]

Since I am limited in my 401k as to what I can invest in ,what recommendations do you have for Brazil in the way of Mutual Funds?

I have a large percentage in DXZLX which mimics EWZ but with a little bit more ooomph to it.

Thanks ahead of time,

The Meltdownman

Oct 13 08:11 AM

[Danny Furman:]

Meltdownman: There are surely others who are better informed regarding mutual funds, but DXZLX makes me a little nervous because leveraged ETFs have an innate flaw as long term investments (seekingalpha.com/artic...). The two emerging market funds I selected for my girlfriend's plan are the T Rowe Price Emerging Market Bond Fund (Brazil exposure and very high yields) and the Oppenheimer Developing Markets Fund A (the best international mutual fund I've seen). In searching for Brazil funds I also came across XBZFX and XBZLX, which may be options for you.

All the best.

Oct 13 09:54 AM

[Bill Charles:]

Danny,

I'm searching for decent stock market software to help in trading. Can you recommend something to look at that would recommend buy/sell/stop prices.

Sincerely,

Bill Charles

Oct 17 03:30 PM

[Danny Furman:]

Bill,
I don't use any software for such purposes. Frankly, I don't incorporate stop losses. I only sell for a satisfactory gain or on bad news. Search Seeking Alpha for reviews or someone more technically proficient.

Oct 18 02:39 AM

[PhreddyPhert:]

Not a good place to be flying round in a helicotpter... Maybe kevlar and body armour companies in the run up to 2016???

Oct 18 12:41 PM

[Bill Charles:]

Danny,

Read your last article dated Oct 9, 2009. It's now Oct 21, 2009, and I'm having withdrawal symptons. Looking forward to your next article, especially now that Brazil is imposing a tax to slow down things a bit. Dang, and my Brazil stocks were doing so well. What are your thoughts on the tax, and where the stocks you've talked about are heading.

Appreciate the reply about software... Think I found something that will help me in trading...

Bill

Oct 21 12:09 PM

[Danny Furman:]

Bill,
Thanks again, never in my wildest dreams did I think my writing would have a narcotic effect :). There is already talk about revoking the tax, as shown by Brazil stocks' outperformance yesterday. Definitely something to stay attentive to but, ultimately, Brazil will continue to outperform other markets enough to make a 2% tax on profits less than tragic. Surely I would be less prone to commit new money to Brazil today than I would have been when I wrote this article and, overall, I am very skeptical buying any stock with worldwide markets at current levels. If, however, markets pull back significantly (or if other markets continue to surge and Brazil lags due to fear about the tax) then I'll be buying Brazil.

PS. Next article is in the works. Value simply isn't as plentiful today as it was in May, when I started writing.

Best of luck to you, Bill.
-Danny

Oct 22 08:58 AM