Maybe You Should Ditch The Mexico ETF For Just 2 Of Its Stocks

by: Emerging Money

By Scott Martin

Mexico's economy is growing at an estimated rate of 4.6% a year - faster than just about any other Latin market you'll find a specialized ETF for. But what's the best way to get exposure to that growth?

Image courtesy SElefant:

The Mexico ETF (NYSEARCA:EWW) is highly concentrated, with just five of the 45 stocks in the portfolio accounting for a full 53% of the overall assets.

Those festive five largely deserve their big weighting, since they effectively represent the rising heft of the Mexican consumer sector: regional cell phone carrier America Movil (NYSE:AMX) at a staggering 24%, Wal-Mart de Mexico (OTCQX:WMMVY) and soda bottler Fomex (NYSE:FMX) at 9% to 10% apiece, broadline retail distributor Casa Saba (NYSE:SAB) at 6% and Televisa (NYSE:TV) at 4.5%.

But with the exception of AMX and SAB, each of these stocks is valued at 21 to 27 times current earnings - at or well above the average P/E of 21 that applies to EWW holdings and far richer than the P/E of 14 you'll find in the S&P 500 (NYSEARCA:SPY).

Granted, Mexico's 4.6% growth should count for something, but even on a PEG basis - price divided by earnings divided by growth - WMMVY, FMX and TV still aren't cheap.

With WMMVY and TV trading at a PEG of 1.4, traditional value- and growth-oriented traders alike may be a bit wary of these two Mexican heavyweights. Any PEG above 1 indicates a stock that's overvalued according to its current earnings and expected future expansion potential over the next five years.

FMX looks even worse on this scale at a PEG of 1.8.

These numbers are especially disappointing when you consider that WMMVY has already fallen over a cliff by 19% in the last three weeks. Before its bribery scandal erupted, this stock - 10% of EWW, don't forget - was even richer.

On the other hand, SAB looks dirt cheap by Mexican standards at a PE under 7. Even AMX, the champion of the Latin American equity markets, seems like a relative bargain compared to EWW or its large-cap Mexican peers with a PE just below 15 - and a PEG below 1.

This is one of those cases where the fundamentals speak for themselves.

Year to date, EWW is up a healthy but not extremely inspiring 10%. A two-stock portfolio allocated 20% SAB and 80% AMX - roughly the proportions you'll find them in EWW - would have delivered a hnady 19.8%.

Drill down, and half of EWW's gains so far this year have come from just these two stocks. As usual, diversification is often its own reward.

But here, the overweight thesis is obvious: stocks that aren't as richly priced have more room to appreciate, and that's good for investors. SAB and AMX still look a lot cheaper than the other big Mexican names, so keep them in mind.