Find the World's Best Caipirinha and a Huge Opportunity in Housing

Brazil is known for its world-class soccer, beaches, and Carnival. But what if you really take your fun seriously?

I don't know what my Global Gains colleagues Bill Mann and Nate Parmelee will do with their free time during their upcoming research trip to South America (to keep up with them in real time, sign up for their email travel log below). For my money, though, a trip to Brazil is incomplete without sampling a first-rate caipirinha (pronounced kuy-pee-REEN-yah), the national drink.

Kuy-pee-what?
While it is now consumed in fashionable bars around the world, caipirinha has humble origins -- the term derives from caipira, Brazilian Portuguese for backwoodsman. To mix one, a long-stem pestle is used to ground lime and sugar together before adding the base alcohol, cahaca (kah-SHAH-sah), a sugar cane brandy.

In Rio de Janeiro, the caipirinha is a versatile companion that is at home in any setting: elegant at the Copacabana Palace or more bohemian in the bars of Santa Teresa, a hillside neighborhood of Rio that is reached by tramway. However, if you're intent on finding the best caipirinha, you could probably do worse than the Academia de Cahaca, with two locations in Rio (Leblon and Barra di Tijuca). The second branch boasts a collection of 2,000 bottles dating back to 1870 that used to belong to a journalist from Minas Gerais (Brazil's best known region for cahaca). The Academia also serves food -- to go with a caipirinha, I recommend the aipim frito (fried manioc with parmesan cheese and melted butter, similar to Italian polenta). Enjoy!

You want me to invest in Brazil?
With a few caipirinhas in you, you're now in a better state to appreciate the charms of the Brazilian market. But seriously, if you still believe that Brazil is a banana republic with stocks that are unfit for your dollars, you're missing out and creating opportunity for others. In 2005, when Motley Fool co-founder Tom Gardner asked NYU valuation guru Aswath Damodaran what his best-ever investment was, he picked Embraer (NYSE: ERJ  ) , a Brazilian aircraft manufacturer:

I bought [Embraer] after the election in 2000. ... The reason I picked Embraer is that Embraer gets 97% of its revenues in Western Europe and North America. They are about as Brazilian as Boeing in terms of what they do. But in that year, because people were concerned about Brazil and Embraer got knocked down to six times earnings, five and a half times earnings, because it was viewed as a Brazilian company.

That is the sort of opportunity that should have you salivating. Meanwhile, selling Embraer on concerns about Brazil's economy is comparable to selling shares in Boeing (NYSE: BA  ) because of a slowdown in the real estate market in California.

Besides, as The Economist pointed out in an April special report, the Brazilian economy is a much safer environment for investors than it was 20 years ago. Currency-crushing hyperinflation has been tamed, thanks to the Real Plan (pronounced ray-ALL; it refers to the new currency), which was implemented in 1994. The Brazilian market's (non-) reaction to the current U.S. subprime crisis is the best demonstration of the country's progress. Usually, when the U.S. market sneezes, Latin American markets catch cold. However, after a brief swoon in August, the Brazilian market has rallied strongly; the MSCI Brazil index is up more than 46% year-to-date and 79% in dollar terms!

Huge opportunity in housing
The differences between the U.S. and Brazil go beyond this year's market returns. Just as U.S. banks such as Merrill Lynch (NYSE: MER  ) and Citigroup (NYSE: C  ) are wrestling with write-offs on subprime securities, Brazil could be on the verge of a boom in residential construction and real estate finance. The combination of newfound price stability and legal reform in housing finance in Brazil is now highly favorable to home ownership. As hurdles to housing supply come down, enormous opportunity is materializing: as one residential builder pointed out in The Economist, "Mexico has 60% of Brazil's population, but builds four times the number of houses" [emphasis mine]. At Global Gains, that's the kind of statistic that gets us very excited.

How can you profit from that? Unfortunately, none of the pure-play mortgage lenders or homebuilders are easily accessible to U.S. investors. However, it's probable that Brazil's banks will participate in this trend:

Company

P/ B

TTM Return

Banco Itau (NYSE: ITU  )

4.1

53%

Banco Bradesco (NYSE: BBD  )

4.0

64%

Unibanco (NYSE: UBB  )

3.0

82%

While those kinds of numbers make me very wary of overvaluation, the increased demand for housing will be a multi-year trend, and there may be other ways to profit from it. Ask yourself: What will this mean for building materials companies? What other goods/services do people purchase when they become homeowners?

Taking advantage of temporary dislocations (such as the one that affected Embraer) and riding powerful long-term trends are two ways in which we try to find market-crushing international stocks at our Global Gains international service. And that's a reason our team is traveling to South America next week -- to check up on some of our best ideas. Get all of our research and reports live from the field simply by providing your email address in the field below.


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