Which country's stock market has performed the best over the past 12 months? Surprisingly it has been Argentina, with a return of 38.75%. Argentina has a dynamic economy with a strong manufacturing base, developed oil and mining sectors, and real growth that averaged 9.6% for the first quarter of 2011. Argentina also is one of the world's leading agricultural exporter, known for its beef and wine production.
The primary concern when it comes to investing in Argentina is inflation. Manipulation of the money supply is a common vote-buying tool in the country that turned the country into the fifth-richest country in terms of GDP per capita in 1905 to a frontier market in modern times. The Argentinean central bank has a horrible record of preserving the value of the Argentine peso with three bouts of hyperinflation in the 1970s, 1989, and 2001. Unfortunately, Argentina has not learned its lesson as inflation is already at estimated 11% annually for 2011 (that's the government's number; outside economists state it is as high as 25%). Below I list two stocks that are largely safe from inflation woes and can outperform other emerging markets securities by capitalizing off of Argentina's growth.
Mercadolibre (NASDAQ:MELI) is the equivalent of eBay (NASDAQ:EBAY) in Latin America and Portugal. It has a non-compete agreement deal with eBay whereby Mercadolibre has monopolistic access in Spanish- and Portuguese-speaking nations in exchange for eBay's control of English-speaking North America. Mercadolibre has no debt and has grown to the point where cash flow from operations will be able to cover any future investment costs. Profitability is also strong, with a 26% profit margin, and the company is utilizing its capital effectively with an off-the-charts 37% return on investment capital. Growth remains strong as well, with an expected earnings growth rate of 35.4% over the next five years. The inflation in Latin American countries actually can benefit Mercadolibre because it will speed the volume of transactions as consumers try to buy goods before they go even higher. Commissions are a percentage of the sales price so they will go up directly with inflation.
YPF S.A. (NYSE:YPF) is Argentina's leading oil company with 38% of the country's oil production. It also produces a significant amount of natural gas that is exported to Spain and throughout Latin America. Oil is a hard asset that will not lose its value with the devaluation of the Argentinean peso, and the company also pays investors a 7.47% dividend yield to hold it during these rocky times. The rest of the company's financials are in good shape as well. YPF has its long term debt amount to just 9% of equity and low P/E and PEG ratios at 11.47 and 1.48 respectively.
Argentina is a high risk frontier market, but also can provide for high rewards. I recommend buying only stocks that will not lose significantly to the eroding problem to inflation (hard assets and companies that are paid based on percentage based fees).
Disclosure: I am long MELI.