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Summary

  • Argentina's economy is in bad shape and in process of bottoming out.
  • This time of weakness and negative sentiment is buying opportunity for Argentine stock market.
  • Arcos Dorados, Mercadolibre, and Adeco Agro are three companies that stand out.

Argentina (NYSEARCA:ARGT) is in a full-blown economic and inflationary crisis. Fortunately the nadir of crises are often the best buying opportunities. With Kirchner losing grip on power and the peso locked into a path hyperinflation that will be forcing effective dollarization in Argentina, we are nearing that bottom point. As a result, three sector leaders in all of South America are trading on the cheap: AdecoAgro in agriculture, Mercadolibre in ecommerce, and Arcos Dorados in fast food.

Adeco Agro (NYSE:AGRO): Adeco Agro is an investment pool, which is the largest owner of farmland in the Southern Cone region of South America. Notable investors such as George Soros have large positions in the company and rising agriculture prices is a bullish catalyst for the stock. Compared to farmland in the US, Europe, Australia, and even Africa trading at bubble prices (sub 3% crop income yields), the underlying property values in the land in AGRO's portfolio is depressed due to the local politics in Argentina. Restrictions on grain exports may also be reduced or lifted in Argentina as the country grows more desperate to turn around its economy.

Mercardolibre (NASDAQ:MELI): Mercadolibre is the eBay of the Spanish and Portuguese speaking world. They are highly profitable and well run with net margins of 28% and a return on investment capital of 31.3%. Until the tapering announcement, the stock outperformed many of the momentum names in the US, but now is trading 40% below its October highs of $145 share. The stock still has a high P/E of 32.3, but this is justified by estimated annual earnings growth rates of 25% and track record of 40%+ average over the previous five years. Growth is sustainable as ecommerce is not as well developed in Latin America and online sales will continue to grow in a similar fashion to developed markets as infrastructure improves. The catalyst holding down MELI has been Venezuela who makes up over 10% of the company's sales. Devaluations there have had negative effects on earnings, but the situation there seems to have already been priced into the stock.

Arcos Dorados (NYSE:ARCO): Arcos Dorados is the world largest franchisee of McDonalds' restaurants and has the exclusive rights to the Americas south of the US border. They have 1,292 locations in Mexico, Brazil, Argentina, Chile, the Caribbean, Peru, Chile, Venezuela and Colombia. The stock has fell 42% from peak to trough due to weak sales from Puerto Rico, Argentina, and Venezuela, and slow growth in Brazil. The growth opportunities are clear, as the US market with a similar population has over 14,000 locations and expansion to reach just 25% of the US market would more than double the stock. A positive earnings beat (which have been rare since the IPO), would be a catalyst to buy as institutional investors have concerns related to the company's management.

Overall, the political and economic woes in Argentina are about as bad as they can get. Since a civil war is unlikely, the prospects of any change beyond the current regime and economic reform are the bullish catalysts needed to prop up their markets. Out of the Buenos Aires market, these are the three best and most liquid opportunities for investors. The Pardini Report is long Adeco Agro and is Arcos Dorados, and is considering a long positions in Mercadolibre when the technical setup is favorable.

Disclosure: I am long ARCO, AGRO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.