The case for emerging market stocks has been made repeatedly, so we do not need to go there. But if you believe in this super-trend, here are 29 stocks in Brazil, Russia, India and China to consider. As always, use the names below as a starting point for your own due diligence:
Petrobras (PBR) is the partially state-owned oil giant of Brazil, with a market cap of $259.2B. Although investors often shy away from state-owned companies, Petrobras seems to receive benefits from this status, acting as a near monopoly in the Brazilian oil industry. In the past few years, the company has discovered several huge oil megafields off the Brazilian coast, bringing its reserves near the top of the global oil industry and setting Brazil up to become a major world oil producer.
Considering its expertise in offshore drilling, we believe that its enormous $224 billion investment plan in these fields will pay off. With oil prices on the rise and the Middle East becoming less and less stable, Petrobras could see a huge rise in revenue. Finally, Petrobras’ growing presence could be huge for the rest of Brazil: The company’s rising profits, much of which belong to the government, should help protect the country from rising oil prices like those that helped cause the Latin American debt crisis of the '90s.
Petrobras also presents a good set of fundamentals and Soros is a buyer. The stock is trading at a P/E of 9.6, which is lower than the industry average. The company’s most recent quarter was its most profitable ever, with net income rising 38%. With outstanding ROE and profit margins, the company is efficient and has a good current ratio of 1.76. PBR also offers a small dividend yield of 0.39%. We think shares are approaching our fair value estimate of $45. But overall, we think that the stock has ideal fundamental and qualitative factors that will make it a winner over the long-term.
Vale (VALE) is a metals and mining company, ranking as the world’s biggest iron ore producer and second biggest nickel producer. It produces several other metals as well, and has a market cap of $172.3B. Privatized in 1997, the firm exports a large amount of its products to China, which is quickly becoming the largest market for both nickel and iron. The stock trades at a P/E of 10.3, below the industry average. Furthermore, average analyst estimates for 2011 EPS are $4.96, a huge rise from 2010 EPS of 3.23. The rest of VALE’s fundamentals are also strong, with a top-notch operating margin of 47% and ROE of 27%. The stock pays a dividend yield of 1.3%. Grantham picked up shares during the most recent reporting period. With strong fundamentals, low valuation, and huge growth opportunities, VALE appears to be a Brazilian keeper.
In the mining space we like Cloud Peak Energy (CLD) most, which is a potential acquisition candidate for a foreign or domestic buyer.
Companhia de Bebidas das Americas (ABV): Another Grantham favorite, known as AmBev, this Brazilian alcoholic beverage producer has a market cap of $55.7B and is one of the largest brewers in the world. AmBev is a subsidiary of Anheuser-Busch InBev, and sells beer and PepsiCo products throughout Latin America. In addition to its Brazilian breweries, it owns Quinsa, the largest brewer in Argentina. There is no doubt that the booze will be flowing during the World Cup and Olympics in Brazil, and tourists will surely be interested in trying local brews. Although these are only temporary profits, this extra cash will make the firm more financially healthy, allowing it to expand more easily.
As the largest beer producer in Brazil, AmBev should also benefit from a growing middle class that could come with Brazil’s continued economic development. Finally, the firm has plans to invest $1.5 billion to increase capacity, helping it take advantage of increasing demand. Over the past year, AmBev had a ROE of 28.78%, which is very strong compared to its competitors in the industry. ABV is trading at a 19.44 P/E ratio and offers a 1.91% dividend yield.
Itau Unibanco (ITUB): Ainslie recently added a position in ITUB at the average price of $24.38. Known as the largest non-government-owned bank in Latin America, ITUB was formed through the merger of Itau and Unibanco. Based in Brazil, it has operations in other Latin American countries as well. ITUB has performed extremely well of late. With ROE of 24%, non-performing loans were down at the end of 2010. Because of its strong presence in Brazil, we think that ITUB is well positioned for growth throughout Latin America. Analysts expect EPS to grow significantly in the next two years. Currently, ITUB is trading at a 10.0 P/E, and is offering a 0.4% dividend. ITUB has a market cap of $101B.
Gol Linhas Aereas Inteligentes (GOL): The Brazilian airliner, with a market cap of $3.6B, just became the leading carrier in Brazil. As part of hosting the World Cup and Olympics, Brazil will spend billions on new transportation infrastructure, upgrading the facilities that GOL has to work with. This is a huge benefit for GOL that will last long beyond the end of these events. Obviously, GOL will also benefit from the increased tourism for the events, especially the World Cup, which will be held in cities throughout the country. Finally, the airline is moving towards a fleet of all Boeing 737’s, a move that has effectively reduced costs for other discount airliners like RyanAir (RYAAY). GOL has already shown itself to be an efficient airline, with an operating margin of 10%, and ROE of 7.73%. While the firm’s P/E is on the high end at 27.96, we think that this is a leading company in a market with tons of upcoming growth. Investing guru John Hussman bought 17,500 shares recently.
Banco Bradesco (BBD): Bradesco, the third-largest bank in Brazil, has a market cap of $72B. The bank’s two businesses, the financial segment and insurance segment, account for nearly equal amounts of overall profit. BBD has been one of Brazil’s strongest banks, with Tier 1 capital ratio over 13% and debt/equity of .6. Company ROE was over 20% in 2010, and the firm’s EPS have been increasing over the last couple of years. Although its P/E of 12.69 is slightly higher than ITUB’s, its price/book of 2.7 is lower than ITUB’s of 3. Finally, the firm offers a dividend yield of 0.51%. Guru Kenneth Fisher is a buyer at the average price of $20.77 per share.
Banco Santander Brasil (BSBR): The last of the banks on the list, BSBR is different form the first two. BSBR is the smallest of the main Brazilian banks, with a market cap of $45B, and is the Brazilian unit of the Spanish banking giant Grupo Santander (STD). The unit’s net income doubled in 2010, and is now the most profitable unit in Grupo Santander, contributing around 25% of the group’s total profit.
We think that BSBR receives several benefits from the resources and reputation of its parent company. First, with STD’s home economy struggling, the group is committed to expanding in the high growth market of Brazil. BSBR has important financial backing from STD, which is among the largest and strongest banks around. Second, the firm benefits from STD’s global presence. Not only does this presence allow customers to access resources throughout Latin America, but we also think it can help attract foreign capital due to the familiar name. Although BSBR’s operating margin was near the top of the industry in 2010, its ROE was a modest 6%. Nonetheless, the valuation is also attractive: BSBR’s price/book of 1 is far below its Brazilian competitors, and it also offers a hefty dividend yield of 6.33%. In the end, we think the valuation, along with the powerful Santander backing, make BSBR a good investment in the Brazilian market.
Companhia Energetica de Minas Gerais (CIG): Also known as CEMIG, the state-controlled firm is the largest electric company in Brazil. CIG has a market cap of $12.2B and engages in the generation, transmission and distribution of electricity. The company also engages in natural gas distribution and other energy services. Almost all of its electricity comes from hydroelectric power, making its costs mostly independent of the rising price of oil. Electricity demand in Brazil has been on the rise, and should continue increasing as the economy grows. Although 2010 net income increased by only 5.81% from 2009, CEMIG sold 9% more electricity. With big expansion plans in place, we think CIG will become more able to keep up with Brazil’s growing demand, increasing margins so that they can increase profits by more than they did in 2010. Currently, CIG is trading at a 9.39 P/E ratio and offers a 2% dividend yield. Fisher has been adding shares at the average price of $15.42.
iShares MSCI Brazil Index (EWZ): This ETF is a broader play on Brazil. Investing in equities, the fund attempts to mimic the MSCI Brazil Index. EWZ’s portfolio is weighted most heavily toward large companies, mainly in commodities. Its performance will be heavily influenced by exchange rates, as well as commodity prices. Top holdings include many of the stocks mentioned in this article, with Petrobras, Vale, Itau-Unibanco, Bradesco and AmBev as the top five holdings. Potential investors should pay special attention to these stocks; they account for a huge portion of the portfolio, with Petrobras and Vale alone accounting for over 35% of the total fund. As discussed above, we think these are all good stocks, and as Brazil continues to grow, we think EWZ could be a good investment for those looking for a slightly broader entry into the country.
Vivo (VIV): Vivo is the largest cell phone carrier in Brazil, with 29.55% of the country’s subscribers, and has a market cap of $15.2B. Spain’s Telefonica (TEF) now controls it, after TEF bought out Portugal Telecom’s stake in 2010. Vivo should benefit from Telefonica’s presence, especially as they integrate with Telefonica’s other services throughout Latin America. In fact, VIV is in the midst of an announced merger with Telesp (TSP), Telefonica’s Brazilian landline unit. The merger should provide substantial synergies for both companies. Under the agreement, each Vivo share will be exchanged for 1.55 Telesp shares, meaning that an investment in VIV is really an investment in TSP as well.
With the current stock prices hovering right around this pre-determined exchange rate, it is worth keeping an eye on both stocks. Subscriber growth in 2010 was at 17% for Vivo, even higher than the 2009 growth of 15%. This is indicative of the strong growth in the Brazilian market. Additionally, Vivo has exceptional customer satisfaction ratings, and is ahead of its competition in 3G operations. With a low debt/equity of .32, VIV had an operating margin of 16.85% and ROE of over 18% in 2010. EPS has grown exceptionally the last few years, and analysts project more growth in the near future. Vivo is currently trading at a P/E of 13.4, and at an incredibly low PEG of .2 according to Morningstar. Overall, we think this is a great investment due to the low valuation, Brazil’s growing market, and Vivo’s competitive advantages.
Lukoil (LUKOY.PK) The company's website says it all: “Largest oil company in Russia with over 10 billion barrels in proven reserves, fully integrated from exploration and drilling to distribution and retail.” Lukoil is a giant. Trending up from the mid-50’s since December, the slope steepened significantly in the middle of February, climbing from $64 then to $75 dollars Wednesday. With news out just yesterday that it will be exploring the possibility of U.S. shale reserves, Lukoil reaffirms its status as a global player in the energy field.
Gazprom (OGZPY.PK) Opportunely seizing on the theme of Mideast instability, Alexey Miller, Chairman of the Gazprom Management Committee stated “The situation emerging in foreign markets makes the South Stream project even more essential, desired and ever timely.” Russia’s other name synonymous with energy, Gazprom, has just joined forces with Lukoil to cooperate in natural gas extraction and delivery from the Bolshekhetskaya Depression and the Northern Caspian Sea. Additionally, the company is making major progress on its Sakhalin facilities.Broadly speaking, Gazprom is a direct buy into Russian oil and gas at this moment.
Eurasia Drilling [EDCL: LI] This London-based Russian-focused drilling company is on an acquisition spree, with planned outlays of up to $600 million. It is acquiring within Russia, but the fact that its shares are traded in London may reassure investors wary of investing on Russian regulated markets. It has a small market cap of just under $5 billion dollars, but for those that subscribe to the belief that small is nimble, it could be worth consideration.
Market Vectors Russia ETF (RSX) A notoriously volatile fund, this is a prime choice if you’re looking to directly lever your portfolio to the Russian story. Additionally, this could be added to a portfolio in need of commodities exposure. The ETF has risen 9.4% YTD and 25.5% in the trailing twelve months. Give it some consideration, but be prepared for volatility.
CTC Media Inc. (CTCM) We already spoke about CTCM recently in the article 13 Mid-Cap Stocks Headed for Bellwether Status Soon, and this is what we had to say:
An extremely low PEG ration of .51 and a massive dividend at 6.2% make this Russian media darling pop to our eyes – as well as the eyes of 100+ million Russian television viewers.One of the largest Russian media companies, with a 37% rise in the stock price over the past 12 months and sustained, bounding growth projection for EPS. Media and politics don’t always mesh well in Russia, but notwithstanding an incident the numbers suggest that this name that is in Russian homes daily may soon find its way onto the lips of investors.
In the two weeks since publication the stock has risen 3%.
Vimpelcom (VIP) This wireless telecom operator, present operates throughout Russia, CIS countries and most recently, indicative of its acquisitions strategy in frontier markets, Laos. It doesn’t operate directly in Laos, but acquired its way into the market as it has done in Algeria and similarly frontier and emerging markets.Buoyed by the strength of an emergent middle class demand and actively seeking out similar dynamics outside of its home market in Russia, this is a Russian play that is also a good global telecom play.
Mechel OAO (MTL) Integrating the production of coking coal (Russia’s #1 producer and #3 globally) with its steel manufacturing (6th largest in Russia), Mechel is a play that will benefit from rebounds in the general consumer market-- especially car manufacturing. In fact, as oil and other commodities head higher, it should be well geared for the advance in prices.
Infosys Technologies Ltd. ADR (INFY): As a leading global provider of IT products and services, Infosys is one of the most recognizable names in the field. Once considered a pioneer in the development of global delivery, the company was able to take advantage of numerous opportunities when outsourcing began in the early 1990s and now offers end-to-end services (from consulting to development) to its 590+ worldwide customers -- an impressive feat that puts it on par with other elite service providers such as Accenture (ACN) and IBM (IBM). With repeat business accounting for more than 97% of Infosys' revenue, the company has held up well despite a decrease in IT spending, and with excellent financial health, the firm is well-equipped to take advantage once that spending returns at a time when companies will be looking to outsourcing to cut costs and ease recovery.Shares currently trade for around $72 and yield 0.76%. The P/E ratio is 28.48.
Wipro Ltd. ADR (WIT): Like Infosys, Wipro is one of the largest IT service providers in the world, a claim the firm proved in 2010 when its IT services segment reported revenue of $1.344 billion, a year-over-year growth of 19.3%. With that said, the firm hopes to increase those numbers now that it offers infrastructure management and testing, two high-growth businesses that other Indian IT service providers have yet to penetrate. The firm also boasts one of the world's largest third-party research and development services (a segment which generates 30% of total revenue) and enjoys recurring revenue from 95% of its client base.In 2007, Wipro acquired U.S. firm, InfoCrossing, and opened a software development center in Atlanta, providing Wipro with a valuable onshore U.S. presence. Currently trading for around $15, shares yield 0.80%. P/E is 32.09.
ICICI Bank Ltd. ADR (IBN): With over $100 billion in assets and more than 2,500 branches, ICICI is India's largest non-government-owned financial institution, and one that can widen its lead over the competition as India continues to develop and the firm's insurance unit begins to turn a profit. Laying claim to 12% of the market, the insurance segment ranks among the leading insurers in India, but it was not until 2010 that the segment turned a profit. Now that the unit is seeing positive earnings, ICICI can use those earnings to offset credit costs in the banking segments. And with its strong reputation and increased pricing power, the firm will continue to attract more premiums. The banking segment has plenty of room to grow as well, most notably among India's unbanked population, its rising middle class and the millions living abroad. Currently, the P/E is 26.08, and shares trade for around $49. IBN yields 1.05%.
Tata Motors Ltd. ADR (TTM): In June 2008, Tata Motors, India's largest automobile manufacturer, acquired struggling Jaguar Land Rover from Ford for $2.3 billion. In 2011, Jaguar Land Rover reported a record operating profit of $733 million, generating nearly 32% of the $2.3 billion Tata paid. Now with revenue of $20 billion, Tata has increased revenue nearly 500% during the past five years due in large part to dramatic increases in the sale of commercial vehicles and passenger cars in India. And this may only be the beginning of a quick sales climb. At 8 cars per 1,000 people, India's car penetration is among the lowest in the world, and as the country continues to develop, more people will be in the market for cars. More importantly for investors, Tata has anticipated this rise in Indian automobile ownership and, in response, has developed the Tata Nano, a passenger car with a sticker price of only $2,500. Due to its mass affordability, the Nano has the potential to change the face of the Indian automotive industry and deliver a significant profit for the Indian automaker. Also of note: the current government spending on infrastructure (in India) will benefit Tata and the automotive market. Trading for around $28 at the time of writing, TTM yields 1.14% with a P/E of 27.61.
HDFC Bank Ltd. ADR (HDB): With over $50 billion in assets and 2,000 branches, HDFC isn't quite as big as ICICI, but the firm is still one of India's largest non-government-owned banks, and one that actually has a superior growth rate due to its superior lending standards and higher-income clientele. While other banks like ICICI serve the general population, HDFC has traditionally catered only to India's middle-and upper-income individuals and top firms. This loan practice has kept the firm's nonperforming loans ratio (NPL ratio) at a very low 1.1% (for comparison, ICICI's NPL ratio is 4.9%) even as loan growth continues to average over 40% annually. HDFC has also managed to expand its deposit base at a similar rate, which allows the firm to maintain a low cost of funds and preserve profitability. And with deposits being 1.3 times total loans, the bank has produced net interest margins exceeding 4% for the past ten years. Now, HDFC is set to profit from India's development, considering the bank will continue to supply financial resources to people and firms that will likely have a hand in the nation's growth. And considering that the Reserve Bank of India has tight rules regarding the entry of foreign banks, international competition will likely be kept at bay. HDB currently trades for $172.15 and yields 0.45%. The P/E ratio is 31.88.
Mahanagar Telephone Nigam Limited ADR (MTE): While this provider of wireless and fixed-line telephone services in India and abroad may be more of an uncertainty than previous entries on this list, the firm still has potential for growth due to a developing wireless market in India, and plans to extend operations into the Middle East. With 4 million wireless customers and 3.7 million fixed-line customers in Delhi and Mumbai, MTNL is in talks to obtain a pan-India wireless license, and has plans to build a cable network from India to the Middle East. The wireless license will afford the firm full exposure to a nation where wireless penetration is still low and ripe for growth, and the cable network will help the firm escape competitive pressures at home by expanding into new markets. It is also worth noting that the Indian government owns 56% of shares, and that due to this government financial support, MTNL has zero debt. Shares currently trade for $2.15 and yield 1.97%.
PetroChina Company (PTR) is an oil and gas producer that operates within the People's Republic of China. PetroChina is involved in exploration, refining, and distribution of oil. It also has almost 20,000 service stations throughout China. In May, PetroChina announced that it plans to set up three operations centers in New York, London, and Singapore. This is a move that the company says will help it gain greater influence in the global market. It is the largest oil company in China and has a market cap of $256.3 billion.
PTR has a few things going for it that makes it a solid bet. Fundamentally, PTR has a price to earnings ratio of 11.67 compared to an industry average of 15.76. It also has a PEG ratio of 0.97 compared to an industry average of 1.43. PetroChina currently has a 12.00 earnings per share ratio. Another plus for PetroChina is that it is currently yielding 3%. It has a semi-annual dividend payment and the last recorded dividend was $2.1112 in December, 2010. In addition, PetroChina has an operating margin of 12.3% compared to the industry average of 11.6% and a net margin of 9.1% compared to the industry average of 6.2%.
CNOOC Ltd. (CEO) is an oil company that operates in the People's Republic of China. CEO explores for oil, gas, and other petroleum products in offshore China. More specifically, it has units in Bohai Bay, Indonesia, Australia, Nigeria and all over the China Sea. It is the third-largest oil company from China and has a market cap of $107.83 billion.
CNOOC Limited is currently trading around $240.44 and has a price to earnings ratio of 12.91. It also has a forward price to earnings of 10.3. It boasts a 0.41 PEG ratio. It has solid margins at 38.59% and has 12.88 billion in operating cash flow. CEO also pays a nice dividend. In the first quarter of 2011, CEO paid out a quarterly dividend of $2.4336. CNOOC has a projected yield of 2.4%. I think that CEO will continue to expand revenue and the companies EPS Growth is 18.9.
We think CNOOC represents a mildly better bet than stateside competitors Exxon (XOM), Conoco (COP) and Chevron (CVX). It is a clear long-term winner relative to British Petroleum (BP), which we think may encounter production access problems going forward given its recent history in the GOM.
NetEase.com Inc. (NTES) was founded 1997 as an Internet portal. It has since added many online features but is widely known for its games. NTES has a development team that has created many hits. The company hosts its own games and licensed games from other game developers. Almost all of the company’s revenue comes from the hourly fee NetEase.com charges its users. The company does have other revenue streams such as advertisements. Beyond gaming, the site has a large range of uses and services including search, instant messaging, forums, shopping, news, and even matchmaking. It is based in Beijing, the People's Republic of China and has a market cap of $5.6 billion.
NTES has many famous games and brands on the market and in 2009 listed its intangible assets as $32.9 million. The company also has solid fundamentals. It is trading around $43.36 and has a price to earnings ratio of 14.0 compared to an industry average of 29.8. It has an operating margin of 45.9% and a net margin of 43.1%. The future seems pretty good for NetEase.com. It has a forward price to earnings of 11.31 and a PEG ratio of 0.81. I think that NetEase.com is in a great position but one must be weary of the online gaming industry, as a whole, because of the volatility and need for constant innovation.
Baidu Inc. (BIDU) is China’s largest Internet search provider. It is currently ranked the sixth most-viewed website in the world, behind competitors Google (GOOG) and Yahoo (YHOO). Baidu offers a range of services such as instant messaging, news compilation, an e-commerce platform, and others. The majority of Baidu’s revenue comes from online advertising and paid search advertising. The company underwent a 10:1 stock split in May 2010. It is trading around $124.83 and has a market cap of $43.5 billion.
Baidu had a stellar first quarter this year. BIDU announced that it had more than doubled first-quarter profits from 480.5 million yuan to 1.07 billion yuan. In the same quarter, revenue rose 88%. Baidu can continue this success with the help of a continual shift towards online advertising. BIDU has a PEG ratio of 0.96 and a revenue growth of 20.6. It also has an operating margin of 51% and an EPS growth of 77.3. Google pulled out of China in March 2010 and has left a lot of market share for Baidu to grab. Baidu is a growth stock and with its customer base expanding from the Google void, I would expect to see more growth.
Focus Media Holding Ltd. (FMCN) is a multi-platform advertising company. It has advertisements that are out of the home and in commercial areas, in stores, in video games, and poster frames. Its multimedia network connects all of these and is the largest network in China. FMCN had some trouble during the 2008 credit crisis, but has emerged alive and restructured. This real-world advertising leader has a market cap of $4.1 billion.
Focus Media did very well in the first quarter of 2011. It saw its net revenue jump 51% and adjusted earnings came in at $0.30, beating analysts’ predictions. It holds a net margin of 36.35% TTM. It has a price to earnings ratio of 19.68, which is slightly above the industry average of 18.18. On the other hand, it does have a PEG ratio of 1.04 compared to the industry average of 1.13. I think Focus Media is a solid buy. I think that FMCN will benefit from advertisers looking for ways to reach Chinese consumers out of the home. Focus Media is also undergoing some strategic acquisitions to stay at the top of the industry. For example, it recently purchased a 15% stake in VisionChina Media Inc. (VISN), which has advertisement networks in mass transportation systems.
51job Inc. (JOBS) is a human resources service that operates online through 51jobs.com. It connects employers with job seekers. JOBS also offers a weekly publication where it sells print advertisements. In addition, the company provides other human resources services such as business process outsourcing and head hunting services. It also leads a series of seminars on various areas of business. 51jobs does business in 56 cities throughout the People's Republic of China and has a market cap of $1.3 billion.
51jobs had a strong first quarter in 2011. Earnings per share rose to $0.47, exceeding analysts’ expectations of $0.40. Revenue jumped by 27.6% and net income was up 78%. JOBS has operating margins of 29.08% and has a PEG ratio of 1.26. On June 7, JOBS took a near 15% drop in stock price following negative news and a disappointing jobs report. This is because if employers do not have job openings there is no reason to buy an ad through 51jobs. Despite this, I will still put a buy recommendation on JOBS. The Chinese job market is much stronger than in the U.S. The weak U.S. job market may ultimately negatively affect the Chinese market, but it will not hinder the Chinese job market significantly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.