2 International Stock Ideas to Consider

As emerging markets have underperformed recently, now could be a good time to buy stocks at a discount to long-term value in this strategic country.

Jun 30, 2014 at 11:03AM

Hosting the World Cup has put Brazil on the world stage. Brazil is the largest economy in South America and has vast natural resources, including offshore oil reserves. However, along with other emerging markets, the Brazilian stock market has underperformed recently. Share prices have dropped so much that now could be a good time to invest in some high-quality companies in Brazil.

A tale of two stock markets
The following graph shows the performance of the iShares MSCI Brazil Capped (NYSEMKT:EWZ) ETF relative to the SPDR S&P 500 (NYSEMKT:SPY) ETF over the last five years:

EWZ Chart

EWZ data by YCharts.

The iShares MSCI Brazil Capped ETF is designed to capture 85% of the Brazilian stock market. Brazil faces some near-term economic headwinds. In particular, the country is coping with weak prices for commodities and slower growth. However, Brazil's long-term prospects are still bright. 

A promising future
Brazil has a young population and a growing middle class. While income inequality is rising in the U.S., it is falling in Brazil. Brazil is the 10th-biggest oil-producer in the world, according to the U.S. Energy Information Administration. Its national debt as a percentage of GDP is approximately 57% compared to about 102% in the United States.

2 investment ideas
Brazil is home to leading regional-jet manufacturer Embraer S.A. (NYSE:ERJ). Due to the high barriers to entry in the commercial aviation manufacturing industry, Embraer has a competitive advantage. Technical and regulatory barriers make it difficult for prospective new entrants to obtain air safety certifications from governments around the world, which are necessary to break into the market.

Rather than competing head-to-head with global aircraft titans that produce jumbo jets, Embraer is focused on building smaller, regional jets with no more than 130 seats. Embraer is a market leader in the regional jet niche. Its jets have superior head space, legroom, and luggage space. Aside from commercial airlines, Embraer sells jets to business executives and military customers

The company's strategy of upgrading its existing lineup of planes, rather than building a new family of jets, is expected to generate positive results. This approach does not require customers to put faith in an entirely new airframe, which could face delivery delays after orders are placed due to stringent testing requirements for new airframes. 

Airlines in the U.S. are looking to replace smaller 50-seat jets with larger planes that offer better fuel efficiency. Embraer could sell 150 of these larger regional jets through 2015, according to chief executive Frederico Curado.

Vale S.A. (NYSE:VALE) is another investment option to consider, especially for value-minded investors. Vale is one of the largest mining companies in the world, producing raw materials used in the production of steel and other industrial products. 

Due to weak commodity prices, Vale faces some near-term challenges. Its revenue has declined 14% over the past four quarters. However, the company has engaged in a cost-cutting campaign, and as a result, its five-year net profit margin has climbed to 23% -- much higher than the industry average of 14% -- and its ratings outlook was recently upgraded by Moody's from neutral to positive. The company's cost-cutting campaign extends through 2015 and includes three phases

  • Low-hanging fruit, including simplification of organizational structures.
  • Efficiency and productivity, with a greater focus on exploration.
  • Structural changes, such as plant optimization efforts.

Lowering costs can help a mining company maintain profitability during the ups and downs of the commodity price cycle. But cost cutting cannot continue forever.

However, Vale has already seen benefits from its cost-cutting initiatives. "For the first time in more than 40 quarters, expenses was the main driver of improvement," said chief executive Murilo Ferreira during a conference call discussing first-quarter performance. Ferreira added, "This is not a one-off event." Vale has a corporate culture of austerity that helps it stay strong when commodities prices swoon

Currently, Vale has a price-to-book-value ratio of 1.5 -- just half the industry average of three. The price-to-book ratio is a useful valuation metric in capital-intensive industries such as mining, because companies in the mining industry have enough net assets, or "book value," to make a meaningful contributions to profits.

Vale's low price-to-book ratio is a sign that the company is undervalued. This could be a good time to acquire a stake in the company at a low price. Vale's current price of about $13 could be 10%-20% below its intrinsic value. 

Don't just watch the games, but consider investing 
Both Embraer and Vale look attractive at the moment. Embraer is likely to continue outperforming due to a strong global brand in the regional jet niche. Vale's recent efforts to reduce its costs leverage the company's strategic advantage, and the company appears to be trading at a discount to intrinsic value. 

While some may argue that Brazil has lost its competitive edge, the country has a number of long-term advantages due to the size and youth of its population, plentiful natural resources, and growing middle-class consumerism. Rather than following the crowd away from emerging markets, now could be a good time to be contrarian and buy stocks in Brazil.

Michael Bodman has no position in any stocks mentioned. The Motley Fool recommends Embraer-Empresa Brasileira. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers