Why Brazilian Stocks Are a Must Buy

by: The Sovereign Society

Looking for some simple guidance on what stocks to buy or sell?

Well, Wall Street is more than happy to help.

In fact, big banks in Wall Street employ hundreds of equity analysts who spend countless hours analyzing stocks. These highly educated analysts then issue very clear “buy” and “sell” recommendations.

So when a bunch of Wall Street Analysts have a “buy” rating on a particular stock, obviously you should be buying, right?

Wrong.

The reality is the weatherman is better at predicting the future than most Wall Street analysts. These highly paid experts are horrible at picking stocks.

Take now, for example. At the moment, Wall Street analysts all hate one emerging market in particular. Personally, I can’t wait to grab some shares in it.

When Analysts Say “Sell," it’s Time to Buy

Recent data from Bloomberg proves you could have outperformed the stock market just by buying stocks the mainstream analysts hated the most.

Since the market bottomed in March of 2009, stocks with the best ratings rose 73% on average. That may sound great, but considering the market has risen 100% since then, that’s a pretty lame performance.

On the other hand, stocks that had the worst ratings rallied by 165%.

Analysts’ favorite sectors for 2010, healthcare and technology, were among the worst performers across 10 industries in the S&P 500. These losers gained less than 10%. Meanwhile, out-of-favor sectors, like banks and real estate firms, gained at least twice as much.

This is just one more reason to disregard all those so-called “great stock tips” coming from Wall Street.

Don’t get me wrong. These Wall Street types are pretty smart people. But when all analysts give a specific stock a “buy” rating, it means everyone is already in love with it. When that happens, there aren’t a lot of investors left to buy and push the stock up higher.

The other side of the coin is that when all analysts hate a particular stock, there’s a great potential for outperformance.

Right now analysts hate one of my favorite emerging markets: Brazil.

Why Everyone Hates One of My All-Time Favorite Markets

Wall Street analysts are now giving Brazilian stocks the fewest “buy” ratings in history. In other words, Latin America’s biggest equity market is out of favor.

That’s interesting considering everyone was in love with Brazil up until recently. It was one of the best performing markets in 2009. But it has been moving sideways for the past year or so, while stocks rallied here in the U.S.

Why did these Wall Street guys change their minds?

Like many other emerging markets, Brazil is struggling with rising inflation. Its Central Bank has started a series of rate hikes to cool down the booming economy. So analysts are concerned higher interest rates will slow consumer demand.

The fact that analysts don’t like Brazil now is telling me it’s time to buy. But I see two other reasons to buy now, especially if you’re a long-term investor.

Analysts are right about higher interest rates pushing stocks lower. But that’s already priced into the market. In fact, that explains the underperformance of Brazilian stocks.

Perfect Time to Buy

But these rate hikes will soon come to an end.

The Brazilian Central Bank has increased the benchmark lending rate by 1% to 11.75% this year. Local economists expect rates to finish 2011 at 12.5%, bringing this cycle of rate hikes to an end.

So interest rates will peak soon. History has shown that it’s always a good time to start accumulating a country’s stocks once rate increases come to an end. The chart below shows that whenever rates peak, stocks rally.

End of Interest Rate Hikes Good News for Stocks

It’s also hard to not like the Brazilian market when it’s this cheap.

Brazilian stocks are trading at a price to earnings (P/E) ratio of only 10.6. Compared to the U.S. market, sitting at 13.4, that’s incredibly cheap. In fact, Brazilian stocks generally trade at a ratio 22% higher.

Anyway you look at it, the Brazilian market is trading at a discount. Usually, you only see these types of discounts when there’s something fundamentally wrong with Brazil.

On the contrary, Brazil now has a growing middle class, thriving commodity exports, and exposure to rising oil prices with its booming oil reserves. Not to mention it’s also hosting the next football World Cup and Olympics.

These are all reasons why Brazilian stocks are on my buy list this year. For Americans, there are easy ways to buy Brazilian stocks through both ADRs and ETFs.

So it’s really a no-brainer to buy – even if the financial geniuses on Wall Street haven’t caught on yet.

Mark my words: It won’t take too long for investors to fall in love with Brazil again. But in the meantime, this is the perfect opportunity to buy this scorned market.

Remember, once all analysts have “buy” ratings on Brazil, it will be too late.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.