One name that comes up when talking about emerging market stocks is Companhia Vale do Rio Doce
With a $12.5 billion market cap, this is a big company. The stock trades at about 10 times 2004's earnings estimate of $5.32. Earnings in 2005 are estimated to grow by 18% to $6.29. Like a lot of other big, old economy foreign companies, the stock looks cheap and has a 4.6% dividend yield.
CVRD's stock had a torrid run-up in the second half of 2003, going from $30 to more than $60 per share. Perhaps this was why it was touted in Barron's at the beginning of 2004. Since then, RIO has corrected about 16% to $51, which is in line with the Brazilian Bovespa's approximate 20% correction.
Understanding the correlation between a stock and its market is important when it comes to foreign investing. Although CVRD only has 4% weight in the Bovespa, it does have a high correlation to that market. The point is that it has been a good proxy for Brazil.
There are systemic risks to consider before investing in Brazil. The country has a long history of volatile growth rates, inflation, and interest rates. There is reason to think that Brazil could do well here. Its gross domestic product (GDP) ended a four-quarter losing streak when the government reported 2.7% growth for the first quarter of 2004 -- thanks in large part to iron ore. Inflation is starting to trend higher, as you might expect in an economy that is turning around.
The country has a lot of debt at 80% of GDP. A U.S. rate increase could be a setback, as investors may no longer need the risk of Brazil for yield. The domino effect here would send rates up in Brazil and then stifle the growth that has started. It is possible that this effect has already been priced in as evidenced by declines in CVRD's stock and the Bovespa.
The bottom line, however, is that CVRD gives investors a leader in a recovering economy with a big dividend.
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Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At the time of publication, neither he nor his clients owned any of the stocks mentioned.