Buying Brazil IV: The Best of the Rest

Includes: CZZ, EWZ, SBS
by: Nicholas Pardini

<< Return to Part III

I mentioned some quality Brazilian stocks that listed in ADRs in previous articles (see part I here, part II here and part III here). In this article I will cover the two best remaining companies that did not apply to my previous columns. Both companies are currently trading at excellent valuations due to pullbacks in commodities and Brazil as a whole.

Sabesp (NYSE:SBS) - Sabesp controls a natural monopoly of the fresh water supply for the city of Sao Paulo. Water may be common, but fresh drinking and cleaning water is incredibly scarce in highly polluted and poorer emerging countries such Brazil. SBS provides clean water to 60% of Sao Paulo state which included over 350 cities in the region. Room for growth comes from expansion into other Brazilian states. The stock is also very cheap, trading under book value and with a P/E under 7. Water shortages, particularly unpolluted fresh water, continue to be an issue in Latin America, and Sabesp is a utility that may appeal to lower risk investors who want to capture emerging market growth.

Cosan (NYSE:CZZ) - Cosan is the world's leading sugar cane exporter and supplier of the crop used in ethanol production. The recent commodity pullback has priced the stock at a bargain (however, watch out for downward technical channel). Brazil has gained energy independence through converting a large portion of its motor vehicles to sugar cane based ethanol and Cozan is a critical part of this transition. Earnings have grown 46% this year, and earnings growth should continue with the price of sugar (however, maybe not as fast of a rate). Cozan also has a forward P/E of 8.77 and a solid 2.3% dividend yield.

Overall, these are some of the top remaining Brazilian stocks on the ADR market I have not covered previously. Sabesp is a contrarian play of the ignored water shortage in emerging markets, while Cozan is a stock that is prime to recover with agricultural commodities.

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