For Investors, Brazil Offers More Than Tiny Bikinis

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Brazil, depending on what tempts you, is widely known for its coffee, nuts, and the world’s tiniest bikinis.


Its appeal, though, especially for investors interested in achieving robust gains overseas, is far greater than that, according to some trackers of the Brazilian market. What looks particularly enticing, it’s said, is a group of seven stocks, including several above-average dividend payers that Morgan Stanley believes can produce healthy returns, some of which could approach 20% over the next 12 months.


Given the lethargic American market this year, an increasing number of Wall Streeters have been turning their eyes toward overseas investments that offer rapid growth and value. Brazil, some Wall Street professionals believe, fits the bill. One is analyst Steven Lord of the Complete Investor newsletter. Pointing to the double-barreled potential of price gains and currency appreciation, he contends that Brazilian investments, given the prospect of a prolonged period of higher inflation and a weak dollar, should be a part of everyone’s portfolio.


Morgan Stanley thinks the same. In a recent research commentary, it noted that Brazil is seeing lower inflation, stronger investment action, and is on the verge of lower interest rates – all of which support improved economic activity. It also expects general estimates of 3% GDP growth this year to soon be raised to 3.4%. Likewise, it anticipates declining inflation expectations this year, dropping to 5.4% from 6.4%, and it notes that domestic stocks in Brazil – up a puny 0.2% in 2005 – have yet to price in currency strength.


As a result, it is adding a number of companies to its Brazilian stock recommendations – namely Companhia Brasileira ($27.46), the country’s largest food retailer; Comp Bedidas Americas ($36.13), one of the world’s largest brewers; Comp Paranaensa Energia ($6.92), an electric utility, and Tel Norte Leste Partici ($16.51), one of the country’s major phone companies.


The four, all traded on the Big Board, are described to me by one of Morgan Stanley’s top trackers of foreign stocks as offering potential returns of 12% to 15% over the next 12 months.


Brazil, of course, is hardly risk-free. As is widely known, it has a checkered history when it comes to inflation and economic stability. But Mr. Lord says Brazil has come a long way and now boasts one of the most stable economies in South America. For example, its GDP growth last year ran 5.2%, compared with 4.4% growth in America. Further, its GDP growth has averaged 2.4% annually over the past 10 years. Likewise, in both 2003 and 2004, Brazil ran record trade surpluses, while recording its first current account surpluses since 1992.


Mr. Lord observes that as is the case with China and India, Brazil’s above-average economic gains and the large disparity between actual GDP dollar value and purchasing power parity should result in both rising share prices and an appreciating currency, manna for American investors in Brazilian stocks. Mr. Lord favors three Brazilian stocks, which trade here as American depository receipts, or ADRs, making them both simple to trade and follow. The three are viewed by our Morgan Stanley foreign stock tracker as solid choices with potential total returns of 15% to 20% over the next 12 to 18 months. They are:


* Embraer ($38.18), one of Brazil’s most successful industrial companies and a major global aerospace firm. Boasting a backlog of nearly 400 orders, representing almost $24 billion, Embraer expects to earn $2.47 per ADR this year, up from $2.17 in 2004, and get to $2.92 in 2006. Meanwhile, its whopping 33% return on equity last year speaks volumes about management’s abilities. The company also pays a 3.7% annual dividend.


* Companhia Vale do Rio Doce ($42.89), the world’s fourth biggest diversified mining company and the largest producer of iron ore and pellets. If you buy the stock, you’ll be in good company since its shareholders include such institutional biggies as Fidelity Management and JP Morgan. Earnings rose 65% last year to $2.24 per ADR and are expected to reach $4.10 in fiscal 2005. Yet despite this hefty growth, the stock’s price-to-earnings multiple is only 11, and there’s a 2.9% annual dividend to boot. The company is also Brazil’s largest logistics firm, owning railroads, ports, and cargo facilities, which should benefit from Brazil’s growing economy.


* Companhia Siderugica National ($22.87), the largest integrated steel producer in Latin America, with interests, as well, in railroads, electricity, and a coal terminal port. This year’s earnings are expected to rise 23% to $3.68 per ADR from $2.98 in 2004. Its 5.8% yield is one of the highest in an emerging market stock, which sports a meager p/e multiple of just 5.


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