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Summary

  • The markets reacted positively to the news that the Federal Reserve announced that it would continue to keep interest rates low until 2015.
  • J.P. Morgan expects emerging market stocks to continue to advance through the remainder of the year.
  • Analysts cited the Fed's tapering, stabilization in China, and an expected pickup in earnings growth in 2015 among the reasons for a continued bull market within emerging markets.

Last Wednesday, the Federal Reserve announced that it would continue to keep interest rates low until 2015, and the markets reacted positively to the news. The S&P 500 (SPX) rose 0.8% and reached a record close of 1,956.99, and the NASDAQ Composite Index (COMP) closed at a fourteen-year high of 4,362.84.

The Fed's decision to hold interest rates also lifted the MSCI Emerging Markets Index by 0.6% on Thursday, resulting in the second straight day of gains, according to Bloomberg. Based in London, the index, which was created by Morgan Stanley Capital International, measures equity performance in twenty-three emerging economies.

Over at Barron's, excerpts from a J.P. Morgan (NYSE:JPM) strategy report reveal that the investment bank expects emerging market stocks to continue to advance through the remainder of the year. Analysts cited the non-existent impact from the Fed's tapering, below-potential growth, steady growth stabilization in China, and an expected pickup in earnings growth in 2015 among the reasons for a continued bull market within emerging markets.

The rally drove us to look for investment opportunities among emerging market stocks. We began with a universe of emerging market stocks belonging to the countries listed in the MSCI Emerging Market Index. Next, we screened that group for stocks that are rallying above their 20-day, 50-day, and 200-day simple moving average (SMA) since the index has advanced for two consecutive days and emerging market currencies are strengthening.

For our final screen, we looked for undervalued stocks as indicated by an EPS/price mismatch. If you assume that a company's price-to-earnings (P/E) ratio is equal to a constant k, then an increase in the EPS estimate for a stock should lead to a proportional increase in the stock's share price. When the increase in the EPS estimate is greater than the increase in share price, it's possible that a mispricing has occurred, which means that you're potentially looking at an undervalued stock.

In the aforementioned screen, we used the latest average analyst estimate for full-year EPS and compared it to the estimate from 30 days ago. Then we compared changes in stock price over the same period.

We were left with three undervalued and rallying emerging market stocks on our list. Do you think these stocks will continue to climb? Use this list as a starting point for your own analysis, and let us know what you think in the comments.

1. Cia Energetica de Minas Gerais (CIG, Kapitall snapshot): Engages in the generation, transformation, transmission, distribution, and sale of electric energy primarily in Minas Gerais, Brazil. Market cap at $10.49B, most recent closing price at $8.40.

The EPS estimate for the company's current year increased from 1.54 to 1.78 over the last 30 days, an increase of 15.58%. This increase came during a time when the stock price changed by 8.5% (from 7.29 to 7.91 over the last 30 days).

The stock is currently rallying 9.98% above its 20-day SMA, 14.27% above its 50-day SMA, and 34.77% above its 200-day SMA.

2. Empresas ICA, S.A.B. de C.V. (ICA, Kapitall snapshot): Engages in the construction and related activities in Mexico. Market cap at $1.23B, most recent closing price at $8.16.

The EPS estimate for the company's current year increased from 0.5 to 0.65 over the last 30 days, an increase of 30%. This increase came during a time when the stock price changed by 8.48% (from 7.43 to 8.06 over the last 30 days).

The stock is currently rallying 0.80% above its 20-day SMA, 9.12% above its 50-day SMA, and 5.99% above its 200-day SMA.

3. Tsakos Energy Navigation Ltd. (TNP, Kapitall snapshot): Provides seaborne crude oil and petroleum product transportation services worldwide. Market cap at $614.92M, most recent closing price at $7.26.

The EPS estimate for the company's current year increased from 0.31 to 0.4 over the last 30 days, an increase of 29.03%. This increase came during a time when the stock price changed by 4.46% (from 6.95 to 7.26 over the last 30 days).

The stock is currently rallying 0.87% above its 20-day SMA, 1.67% above its 50-day SMA, and 16.84% above its 200-day SMA.

Source: Rallying Emerging Market Stocks Keep The EM Rally Alive