Herzfeld Caribbean Basin Fund: Is The Rally Justified?

| About: Herzfeld Caribbean (CUBA)
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Summary

Shares of Herzfeld Caribbean Basin Fund rallied more than 30% on news that the Obama administration may normalize relations with Cuba.

The NAV of Herzfeld Caribbean Basin Fund justifies a 15-20% rally..

There is not much upside left, as most of Herzfeld Caribbean Basin Fund's underlying companies will continue to derive most of their business outside Cuba.

Shares of Herzfeld Caribbean Basin Fund (NASDAQ:CUBA) rallied more than 30% on December 17 on the news that the Obama administration may normalize relations with Cuba. The normalization of relations between the U.S. and Cuba would be positive for Cuban businesses, as normalization will bring more tourism and investment to the island nation.

As for the rally in Herzfeld Caribbean Basin Fund, a rally of 15-20% is justified, but not 30%. As of September 30 2014, Herzfeld Caribbean Basin Fund had the following stocks in its fund:

SCHEDULE OF INVESTMENTS AS OF September 30, 2014 (unaudited)


Shares or

Principal Amount

Description Market

Value

Common stocks - 99.16% of net assets
Airlines - 9.31%
15,000 Avianca Holdings, SA Spon ADR (NYSE:AVH) 205,800
25,800 Copa Holdings, S.A. (NYSE:CPA) 2,768,082
3,215 ERA Group Inc. (NYSE:ERA) 69,926
Banking and finance - 9.66%
19,280 Bancolombia, S.A. (NYSE:CIB) 1,093,562
42,300 Banco Latinoamericano de Exportaciones, S.A. 1,297,764
6,000 Popular Inc. (NASDAQ:BPOP) 176,610
17,643 Evertec Inc. (NYSE:EVTC) 394,145
3,844 W Holding Co. Inc. --
12,000 Western Union (NYSE:WU) 192,480
Communications - 9.93%
44,690 America Movil, S.A.B. de C.V. ADR (NYSE:AMX) 1,126,188
71,200 America Movil, S.A.B. de C.V. Series A 88,534
209,144 America Movil, S.A.B. de C.V. Series L 263,644
8,000 Atlantic Tele-Network, Inc. 431,200
518,210 Fuego Enterprises Inc. (OTCPK:FUGI) 62,185
210,994 Grupo Radio Centro, S.A.B. de C.V. Series A 270,218
28,400 Grupo Televisa, S.A.B. ADR (NYSE:TV) 962,192
10,030 Spanish Broadcasting System, Inc. 42,126
Conglomerates and holdings companies - 0.05%
250,000 Admiralty Holding Company --
70,348 BCB Holdings Ltd. 13,685
3,250 Shellshock Ltd. Ord. 3,583
Construction and related - 10.29%
56,743 Cemex S.A.B. de C.V. ADR (NYSE:CX) 739,929
62,754 Cemex S.A.B. de C.V. Series CPO 81,770
20 Ceramica Carabobo Class A ADR --
67,100 Mastec, Inc. (NYSE:MTZ) 2,054,602
4,000 Vulcan Materials (NYSE:VMC) 240,920
1,900 Martin Marietta Materials (NYSE:MLM) 244,986
Consumer products and related manufacturing - 3.24%
327,290 Grupo Casa Saba, S.A.B. de C.V. ADR --
12,300 Watsco Incorporated 1,060,014
Food, beverages and tobacco - 13.38%
63,809 Chiquita Brands International Inc. (NYSE:CQB) 906,088
53,874 Cleanpath Resources Corp. (OTCPK:CLNP) 11
19,602 Coca Cola Femsa, S.A.B. de C.V. ADR (NYSE:KOF) 1,974,313
18,900 Fomento Economico Mexicano, S.A.B. de C.V. Series UBD 173,812
9,500 Fomento Economico Mexicano, S.A.B. de C.V. ADR (NYSE:FMX) 874,475
13,890 Fresh Del Monte Produce Inc. (NYSE:FDP) 443,091
Housing - 4.83%
40,500 Lennar Corporation (NYSE:LEN) 1,572,615
6,100 Homex Development Corp. 6,039

SCHEDULE OF INVESTMENTS AS OF September 30, 2014 (unaudited) (continued)


Shares or

Principal Amount

Description Market

Value

Common stocks - 99.16% of net assets
Investment companies - 0.11%
800 Latin American Discovery Fund, Inc. (NYSE:LDF) 10,481
1,451 Mexico Equity and Income Fund (NYSE:MXE) 23,898
70,348 Waterloo Investment Holdings Ltd --
Leisure - 15.42%
31,000 Carnival Corp. (NYSE:CCL) 1,245,270
36,443 Norwegian Cruise Line Holdings (NASDAQ:NCLH) 1,312,677
26,000 Royal Caribbean Cruises Ltd. (NYSE:RCL) 1,749,540
19,467 Steiner Leisure Ltd. (NASDAQ:STNR) 731,765
Mining - 4.22%
3,872 Grupo Mexico, S.A.B. de C.V. Series B 13,011
27,000 Freeport Mcmoran Copper (NYSE:FCX) 881,550
23,900 Tahoe Resources, Inc. (NYSE:THO) 485,170
Pulp and paper - 0.13%
18,300 Kimberly-Clark de Mexico, S.A.B. de C.V. Series A 43,181
Railroad - 1.88%
5,500 Norfolk Southern Corporation (NYSE:NSC) 613,800
Retail - 1.99%
1,270 Grupo Elektra, S.A.B. de C.V. Series CPO 35,923
1,000 Pricesmart, Inc. (NASDAQ:PSMT) 85,640
210,222 Wal-Mart de Mexico, S.A.B. de C.V. Series V 529,067
Service - 0.03%
700 Grupo Aeroportuario del Sureste, S.A.B. de C.V. Series B 9,032
Trucking and marine freight - 7.32%
12,280 Grupo TMM, S.A.B. ADR (OTCQB:GTMAY) 28,858
633 Seaboard Corporation (NYSEMKT:SEB) 1,693,269
2,000 Seacor Holdings, Inc. (NYSE:CKH) 149,600
9,361 Teekay LNG Partners LP (NYSE:TGP) 407,765
36,000 Ultrapetrol Bahamas Ltd. (NASDAQ:ULTR) 112,320
Utilities - 6.27%
12,000 Caribbean Utilities Ltd. Class A 128,976
104,013 Consolidated Water, Inc. (NASDAQ:CWCO) 1,214,872
700 Cuban Electric Company --
40,500 Teco Energy Inc. (NYSE:TE) 703,890
Other - 1.10%
25,000 Geltech Solutions Inc. (OTCPK:GLTC) 8,750
4,420 Gusborne PLC 5,123
13,000 Impellam Group 108,536
55,921 Margo Caribe, Inc. (OTCPK:MRGO) 237,664
895 Siderurgica Venezolana Sivensa, S.A. ADR --
79 Siderurgica Venezolana Sivensa, S.A. Series B --
Total common stocks - 99.16% (cost $29,267,506) 32,404,218

SCHEDULE OF INVESTMENTS AS OF September 30, 2014 (unaudited) (continued)


Shares or

Principal Amount

Description Market

Value

Bonds - 0.00% of net assets
165,000 Republic of Cuba - 4.5%, 1977 - in default (cost $63,038) --
Other assets less liabilities - 0.84% of net assets $ 273,426
Net assets - 100% (applicable to 3,713,071 shares; equivalent to $8.80 per share) $ 32,677,644

While the Herzfeld Caribbean Basin Fund does not own anything directly tied to Cuba except for 165,000 shares of the Republic of Cuba bonds that defaulted in 1977, many of the fund's underlying companies will benefit at least tangentially from normalization.

In my opinion, infrastructure company MasTec, Inc. will benefit the most as the firm has a good probability of winning Cuban development contracts down the road. Regional airlines such as Copa Holdings should also see more business from more travel between Latin American countries and Cuba while consumer staples companies like Coca Cola Femsa, S.A.B. de C.V. ADR should benefit from more Cubans drinking Coca Cola.

Some of the fund's other underlying companies, on the other hand, like shipper Teekay LNG Partners LP or railroad company Norfolk Southern Corporation will benefit only tangentially from normalization.

Shares of Herzfeld Caribbean Basin Fund were undervalued before the rally from a NAV perspective, as the net assets per share was $8.80 compared to the stock price of $8 on September 30 and the net assets per share was $7.79 compared to a stock price of $6.81 on December 16. Given the massive rally in Herzfeld Caribbean Basin Fund, however, the stock price and the NAV are now much closer. (Shares of Herzfeld Caribbean Basin Fund may actually be trading at a premium depending on where the fund closes on the day versus its underlying stocks).

There is not much upside left because most of Herzfeld Caribbean Basin Fund's holdings are American, Mexican, South American, or Caribbean companies that will continue to get most of their revenues from outside Cuba. Furthermore, a meaningful spike in revenues and profits from a Cuban normalization will likely not show up for a year or more.

Even though the NAV justifies a 15-20% rally, the spike in shares of Herzfeld Caribbean Basin Fund may not last very long from a trading perspective. Herzfeld Caribbean Basin Fund has traded at a discount to its NAV for a long time, and it could trade at a discount to NAV again once again once the euphoria dies down.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.