China-Style Growth at Compelling Prices

Chinese stocks have returned 97% this year -- making China the best market in the world (again).

If you missed out, however, you still have two options:

  1. Chase China's hot returns and hope investors don't all come to their senses at once -- as they did after Crocs' (Nasdaq: CROX  ) latest finance guidance.
  2. Buy into the next great emerging market while valuations are still compelling -- and before the rest of the world.

If you think like I do, option 2 is far more appealing.

Meet the hypocrite (me)
Of course, this message is far different from the one I was spouting back in June as I prepared for a Motley Fool Global Gains research trip to China, India, and Macau. Yes, valuations looked stretched then. However, potential long-term growth in these countries is incredible, and we thought we could find companies offering compelling valuations.

Even better, we did. We profiled the following companies in our free dispatches last June and in a special report that followed. Here are their returns since July 1:

HDFC Bank (NYSE: HDB  ) : +44%
China Fire & Security (Nasdaq: CFSG  ) : +108%
Home Inns (Nasdaq: HMIN  ) : +11%
New Oriental Education: +29%

Before I get too worked up, know that these are short-term returns. Investors in these countries and companies should be prepared for bouts of significant volatility and potential underperformance. Moreover, given those returns, I'm hard-pressed to call any of those companies "buys" today -- even as I continue to hold shares of HDFC Bank.

Solution: New countries, new companies
It's with that background that we're now preparing for a research trip to Latin America. Though not a no-brainer, we've targeted companies in Brazil, Argentina, and Chile because we believe we can find some China-style growth stories trading at more compelling valuations.

Here's an example ...

Profit from macro themes
One way we find emerging market opportunities is to identify broad trends and then drill down to find the companies that will benefit most. A massive global trend, for example, is the cash-less society. A recent study by Visa revealed that your average American is twice as likely to carry a mobile phone than cash, and from 1999 to 2003, cash-less transactions increased from 31% to 35% of total U.S. transactions.

That's also a trend that holds in Brazil. According to research by Planner Corretora de Valores, cash-less transactions increased from 17% to 32% of the total -- the largest increase in the world.

Who stands to benefit? Consider Redecard -- the only company in Brazil that delivers MasterCard accounts to merchants. With a list of investors that includes Citigroup (NYSE: C  ) , MasterCard (NYSE: MA  ) , and Brazil's $60 billion Banco Itau (NYSE: ITU  ) -- and a customer base that's already 80% the size of First Data's -- this is the early leader in a fast-growing niche.

In fact, Planner Corretora de Valores forecasts near 25% annual earnings growth through 2011 on the back of a 23% annual increase in credit and debit card transactions in the country. With the stock trading for 33 times earnings, the valuation certainly does not seem outlandish.

Alas, although the story's a good one, Redecard cannot yet be bought via a U.S. exchange.

More where that came from
Of course, we'll keep watching Redecard and we hope to find more ideas like it during our trip. Because ultimately, in investing, outsized returns are the product of two main components:

  1. The growth you buy.
  2. The price you pay for it.

While we continue to believe that Asian companies will deliver high growth rates, today's prices give us pause. Latin America, on the other hand, seems to offer similar growth potential at far more compelling valuations ... and we'll try to confirm that while on the road.

If you'd like to receive our free, real-time dispatches from the field, simply provide your email address in the box below.


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