6 Picks for Global Investors

Jim Jubak Founder and Editor, JubakPicks.com

As we wait to see how the messes in Europe, China, and the US turn out, it’s time to turn our attention to Australia, Canada, Latin America, and elsewhere, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

So what’s happening everywhere else in the world?

Eyeballs are glued to the European debt crisis.

Investors are sifting through every data dump from the Federal Reserve, the Bureau of Labor, and corporate earnings in the hope of figuring out if the US economy is slowing—and if so, how quickly.

China’s momentum mavens are busy calculating how close the Chinese economy might be to a bottom, and the odds that each piece of bad news might be the one that leads to the next round of stimulus from the People’s Bank of China.

But what about the rest of the world? Which stock markets and which stocks should investors be watching—and maybe putting some money into—outside Europe, the United States, or China?

Investing somewhere besides the markets that are in the headlines assumes that you believe that none of the current crop of potential bad news rises to the level of catastrophe. If one of the world’s big economies and financial markets goes down hard, it’s likely to take down everything.

If China hits a hard landing—a drop to 5% growth and increased social unrest—it’s unlikely that you’ll find safety, let alone profits, in any of the world’s other financial markets. One lesson from the post-Lehman Brothers crisis is that if the crisis is big enough, everything heads down at once.

If, on the other hand, these potential crises don’t turn into great big crises—or really into crises at all—then the "everywhere else" markets could be either:

  • profitable ways to leverage a positive result from any of the world’s headline grabbers, or
  • profitable ways to diversify a portfolio

Let me give the names of six stocks that exemplify those two groups.

The World’s Leverage Markets
Financial markets in these countries are so connected with those of bigger economies that they’ll gallop ahead if the United States or China does. In fact, they might even outrun these bigger economies—and they certainly come with significantly lower risk than China does.

Want to leverage a faster-than-expected turnaround in China’s growth? And with somewhat better financial reporting than you get with many Chinese stocks?

Australia is the obvious choice. The country’s resource-heavy economy sneezes when China catches cold, but it’s not nearly as likely to go into intensive care if monetary policy in Beijing turns frosty.

The iShares MSCI Australia Index Index (EWA) exchange traded fund doesn’t do Australia’s resource economy full justice. Yes, the biggest single weighting in the index goes to iron, coal, oil, uranium, etc. giant BHP Billiton (BHP) at a whopping 13.2%. But the next-biggest weightings in the index go to Australia’s Big Four banks. Total weighting to those four bank stocks adds up to 30.7%.

I think you’re better off owning BHP Billiton itself. The stock went down 21.8% in 2011—about even with the 21.7% drop in the Shanghai Composite Index that year. And it’s roughly matched the gains from that index in 2012 through May 1, at 8.45% to the Shanghai market’s 9%.

Wall Street projects that earnings per share will drop 19.5% for the company’s fiscal year that ends in June. But that would still bring the stock’s price-to-earnings ratio to only 14.1, or roughly the five-year average at 14.3.

By that common measure of value, the stock looks cheap, based on the 16% increase in earnings analysts are projecting for fiscal 2013. It’s even cheaper if China doesn’t fall as hard as expected by commodity markets, which need it for demand, or if it recovers faster than financial markets now project.

Want to leverage faster-than-expected growth in the United States? My suggestion: Think Mexico. The Mexican economy is already growing faster than that of the United States: First-quarter growth for Mexico’s gross domestic product came in at 4%, versus 2.2% for the US. And any acceleration in the US will keep Mexico’s growth rate up there.

If you really want leverage to the US economy, and especially to what looks like it might be a bottom in the construction industry, try Cemex (CX).

The world’s largest producer of ready-mix concrete certainly isn’t for the weak of heart. The company barely survived the global financial crisis after having taken on a truckload of debt to expand in the US market via its acquisition of Rinker in 2007, just as things headed south.

Cemex isn’t out of the woods yet. It has a daunting year-end leverage target to meet that will require that it sell off more assets. But it looks as if those sales will be less than expected, thanks to a recovery in the company’s business.

Sales climbed 4% in the first quarter, the company reported on April 26, and that reduced the company’s net loss for the quarter to $26 million, compared to $229 million in the first quarter of 2011. Operating EBITDA (earnings before interest, taxes, depreciation, and amortization) rose 7% from the first quarter of 2011, to $567 million.

The shares are up 39.3% in 2012 through May 1 after falling 47.7% in 2011. At a recent $7.22, they were back to where they were on July 25, 2011. Cemex traded at $30 a share before the global financial crisis.

My other choice for a leverage market is Canada, and for a leverage stock there, Potash of Saskatchewan (POT).

Potash is leveraged both to the US economy, where the US Department of Agriculture has projected a 4% increase in corn planting this year over last year, and to China, where recent contract settlements with Chinese buyers have stabilized prices. I added Potash to my 12-to-18-month Jubak’s Picks portfolio on April 4.

NEXT: The World’s Diversification Markets

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The World’s Diversification Markets
The second group is concentrated in Latin America. It is made up of stocks from economies that will, of course, do better if the big trains of the global economy are accelerating. But these stocks have enough purely domestic factors pushing growth that they might do better than China or the United States if growth in those economies is solid but less than hoped for.

Here, the best bet is, far and away, Brazil. The central bank, the Banco Central do Brasil, cut interest rates to 9% from 12.5% last August in an effort to revive economic growth. The economy grew by just 2.7% last year after growing by 7.5% in 2010.

A recent survey of economists by the central bank projected that growth will recover to 3.3% this year, and rise to 4.15% in 2013.That pickup in domestic growth plus a big drop in the real, which sank to a five-month low on Wednesday, will give a big boost to Brazilian exporters.

Here, I’d look at Brazilian steelmaker Gerdau (GGB), a Jubak’s Pick. The shares were down 42.9% in 2011, but were up 21.6% this year through May 1.

Gerdau exports about 40% of its Brazilian production. The company produces about 33% of its steel in its US mills.

To go with Gerdau, I’d pick a more purely domestic Brazilian company. My three favorites, unfortunately, trade only in São Paulo. If your broker has a good international desk, look at Localiza Rent a Car (RENT3.BZ); Natura Cosmeticos (NATU3.BZ), the biggest cosmetics company in Latin America; and Kroton Educacional (KROT11.BZ), a fast-growing operator of schools and colleges.

My Brazilian domestic pick for investors limited to the US markets is Arcos Dorados (ARCO). The Argentine-based company is the largest McDonald’s franchisee in the world, with 1,840 restaurants, and the largest restaurant operator in Latin America.

Its Brazilian operation grew revenue by 24.4% in the third quarter, and then slumped to 4.7% growth in the fourth quarter. The shares have been volatile in 2012, with a February 6 high at $22.86 and an April 27 low of $17.79. The company is due to announce first-quarter earnings on Friday.

That’s two from Brazil—Gerdau and Arcos Dorados—and to fill out my list of six, I’m going to recommend one from Chile.

Chile has one of the best-run economies in the world—its finance minister recently said that the country would not issue international bonds this year, because it doesn’t need to. But GDP growth has slowed to a projected 4% to 5% in 2012, from 6% in 2011, on slowing copper exports and power shortages in the country’s north that have curtailed copper production.

Chile’s domestic economy continues to show strength, with retail sales up 9.2% year to year in March and supermarket sales up 10.3%.

Investing in a purely domestic Chilean company runs into the same problems I mentioned in my section on Brazil. If you can trade in Santiago, I’d recommend Cencosud (CENCOSUD.CI), a supermarket operator that has expanded across the border into Argentina. (The stock has taken a beating lately on rumors that after expropriating oil company YPF Sociedad Anonima (YPF), the Argentine government will go after supermarkets. Seems a stretch to me.)

Another Chilean company, one with more of an export bent but that also sells only in Santiago, is Empresas Aquachile (AQUACHIL.CI), a producer of farmed fish. Chile’s exports of farmed fish grew by 48% in 2011 from depressed 2010 levels.

If you’re limited to buying US-traded shares, your best bet for Chile remains Lan Airlines (LFL), the biggest airline in Latin America. Lan’s acquisition of Brazil’s Tam is expected to close this month.

Lan’s shares have been depressed lately as the deal works its way through the last stages of regulatory approval in Chile. (Lan is a member of my long-term Jubak Picks 50 portfolio.)

My list of six (BHP Billiton, Cemex, Potash of Saskatchewan, Gerdau, Arcos Dorados, and Lan Airlines) from elsewhere doesn’t exhaust the rest of the globe. I haven’t mentioned the Philippines, Sweden, or Indonesia. But these picks should get your globe-hopping started.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.