Winners Emerging 

12/08/2009 12:01 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Shares of a big Brazilian bank and a small Chinese power plant builder have recently broken out to the up side, writes Paul Goodwin of the Cabot China & Emerging Markets Report.

Emerging markets are hot, but volatile, as the end of the year approaches, and most of us have better things to do than ride herd on a flock of growth stocks that are acting like a box of puppies. It's a good time to look for a strong stock with some good defensive characteristics that won't spring an unpleasant surprise on you while you're shopping for a Christmas tree.

And Itaú Unibanco (Nasdaq: ITUB) definitely qualifies. This Brazilian banking giant is hugely liquid (trades over 12 million shares a day on average), pays a dividend (forward annual dividend yield of 0.3%) and has an estimated forward price/earnings of just 15x.

The bank has a number of breezes at its back, including Brazil's scheduled hosting of both the Olympics in 2016 and (perhaps even a bigger deal for futbol-mad Brazilians) the World Cup in 2012. The anticipated influx of global capital is expected to keep Brazil's economy ticking over nicely, and Itaú Unibanco's size (market cap of $108 billion) and the strength of the Brazilian real make the bank a great partner for international developers.

ITUB has come a long way since it bottomed at eight in March and it has just cleared its all-time highs. [Shares closed at $23.34 in New York Monday—Editor.] All in all, it's an attractive package.

My [other stock pick] is a company that's working in the cracks in the Chinese power grid. A-Power Energy Generation (APWR) is a small company that builds distributed power generating systems but is moving quickly into the Green energy sector.

A typical A-Power project might be a small (less than $50 million) coal-fired power plant that's adjacent to a factory or industrial park and provides power to the local area. The plant may or may not be connected to the national power grid, but for its local users, it will certainly eliminate the brownouts and outages that plague China's national larger grid.

A-Power has a nice backlog of orders in China, and is working to broaden its geographic footprint (soliciting contracts in India) and its product line (making wind turbine components from licensed technologies).

Demand for power in China is virtually boundless, and the government is also working hard to get a handle on pollution, which puts A-Power at a very favorable intersection.

The stock has [recently] broken out of a long, rising base that began forming in June when it was trading at 7. After tightening up in October, the stock broke out on November 17th on news of a big secondary order for wind turbine components. And news of plans to build a plant in the US to serve turbine customers in North and South America only add to the stock's potential. [Shares closed at $16.44 in New York Monday—Editor.]

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