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A Latin American auctions site and a Hong Kong jeweler are capitalizing on rising consumer incomes, writes Paul Goodwin in the Cabot China and Emerging Markets Report.

eBay (Nasdaq: EBAY) is well known as one of the greatest online retailers, a great resource for both institutional and individual buyers and sellers of everything from old baseballs to new cars. Far less well known, and with far greater investment potential, is the eBay of Latin America, MercadoLibre (Nasdaq: MELI) (the name means free market).

MercadoLibre is an Argentinean company that provides the same kind of e-commerce transactions as eBay, including fixed-price and auction sales, dedicated market places for cars, boats, planes, real estate and services, and an online payment platform. The company was founded in 1999, and it’s the largest online trading platform in Latin America. It has operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Portugal, Uruguay, and Venezuela, with recent expansions bringing Costa Rica, the Dominican Republic, and Panama into the mix. 

The Marketplace has nearly 43 million registered users, and sales are expedited by a very efficient search engine, leading to gross merchandise sales of $2.7 billion in 2009. MercadoPago, the company’s online payment system, processed over three million payments in 2009 and contributed 26% of revenues for the year. 

The drivers for future growth are expected to be:

1. increasing penetration of Internet access in Latin America as the area’s telecom infrastructure builds out,
2. strong gross domestic product (GDP) growth in the region, which will increase disposable income for its large population, and
3. the introduction of MercadoShops that offer sellers their own online sales channels, and MercadoClics, a search platform that uses sales of display ads and a program like Google’s AdWords to generate income.

[Shares have gained 8.8% since Goodwin recommended them at $64—Editor.]

[My other suggestion] is LJ International (Nasdaq: JADE), a [much] smaller company [with] sales of just $125 million annually. This Hong Kong-based manufacturer of jewelry from gold, platinum, and precious stones has been booking some excellent earnings numbers.

LJ’s four most-recent quarters have produced earnings growth of 150%, 50%, 600%, and 800%, with after-tax profit margins of 7%, a multi-year high. 

Earnings like that will get investors’ attention, and the trailing price-to-earnings ratio of ten (and forward P/E of eight) doesn’t hurt either.

JADE is just organizing a nice breakout above its long-time resistance at $3. I like that JADE is resisting the market’s volatility and inching above long-term resistance. I don’t like that it’s a very low-priced stock (which will keep many institutional investors from signing on) and that trading volume is low (just 124,000 shares a day, on average).

But Chinese appetite for gold jewelry continues unabated, and LJ International’s diversified distribution includes fine jewelers, department stores, and TV shopping channels.

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