Thanks to a rapidly growing middle class, above-average expected gross domestic product growth, significant natural resources, and an increasingly friendly business climate, investor interest in Brazil is on the rise. And that's a smart move. At Motley Fool Global Gains, we advise investors to have 9% to 16% exposure to Latin America, with investments in Brazil representing the core of that position. So what are some stocks you can buy today to get you that exposure? Here is a handful to get you started:
Company: Brazil Fast Food (OTC: BOBS.OB)
Recent Price: $6.98
Investment thesis: After a few lean years, this fast-food franchiser is once again profitable and ready to grow several restaurant concepts in Brazil, Chile, and Paraguay to take advantage of rising consumer spending in the country. This includes the exclusive rights to grow YUM! Brands'
Valuation: At less than $7 share with a market cap just north of $50 million, the stock is trading for just 0.6 times sales and six times EBITDA. Although margins came under pressure in the second quarter, operating margins at the company-operated restaurants should ultimately stabilize around 7% with franchise margins around 60%. Assuming the company achieves its store expansion plans and can maintain 1% to 2% same-store sales growth, the stock looks to be worth at least $8 per share.
Potential points of failure: Brazil Fast Food is the clear No. 2 in the Brazilian market to McDonald's
Company: Redecard (Pink Sheets: RDCRL.PK)
Recent Price: $28.70
Investment thesis: Economic and consumer spending growth in Brazil will lead to greater use of credit and debit cards earning Redecard -- the leading acquirer of MasterCard
Valuation: Although the stock looks expensive at a little more than 10 times EBITDA, the stock is off some 25% since highs reached earlier this year. Although revenue growth has come in light during the first half of the year, the company continues to sustain a better than 80% gross margin and sales are on the rebound. The GDRs look to be worth about $34 each.
Potential points of failure: Although Brazil's consumption trends are strong, the wild card here is competition. Redecard and competitor Cielo, previously Visa's
Recent price: $12.05
Investment thesis: Given its niche as a leading trade bank in Latin America, Bladex has positioned itself well to profit from an economic recovery in the region. The stock also remains exceptionally cheap, and investors should benefit from a potentially significant increase in the bank's dividend.
Valuation: Although Bladex is a lower-risk, lower-return bank, its valuation at just 0.7 times book value alongside a 5% dividend represent a compelling way for investors to participate in Latin America's economic growth.
Potential points of failure: Bladex has been able to begin increasing the size of its loan portfolio thanks to an economic recovery in Latin America that's been driven by stronger commodity prices. Should those prices collapse, Bladex could see loan growth slow and provisioning go up. The company's asset management division has also been dragging on results this year, and its losses could compromise the core business if left uncontrolled.
Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Bladex. Banco Latinoamericano de Comercio Exterior is a Motley Fool Global Gains pick. Motley Fool Options has recommended a bull call spread position on Yum! Brands. The Fool owns shares of Banco Latinoamericano de Comercio Exterior and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.