Resource Demand Drives Brazil's Stocks

03/21/2013 9:00 am EST


Rudy Martin

Editor, Investing Insight

Brazil’s new middle class is straining resources, which is developing opportunities for investors, writes Rudy Martin of Latin Stock Investing.

In fact, despite all the bad press about Brazil’s slower-than-expected growth in 2012, I’ve spotted several value-based opportunities in that country.

Add Brazilian water-utility Sabesp (SBS) at up to 10% of the Dividend portfolio at market, increasing the current 5% weight with another 5% addition. This stock is a natural way to invest in the global need for clean water.

SBS has historically been one of the most solid stocks to turn to for compound growth over time, boasting a 29% return over the last 12 months. With a water franchise on one of the most-dynamic business regions on earth, Sabesp is hitting new highs, and could provide a flood of profits over the longer term.

Since October 2008, SBS has steadily risen from less than $9 per share to the recent level just shy of $50—more than a fivefold gain in just over four years. Plus, it carries a 5.2% yield. It’s hitting new highs now, too—recently setting a 52-week high at $48.88.

Not bad for a water utility. Shares are currently trading just a few cents below $48, and I think the time is right to go with the flow and add SBS at up to 5% of your Latin Stock Investing portfolio at market.

Add iron-ore producer Vale (VALE) at up to 7% of the portfolio at market, putting the balance of your cash in the Dividend portfolio to work. It’s highly possible that the pessimism about iron prices is overdone. And with some rate relief, this one could see a modest improvement in estimated earnings, too.

One of the other two large players, Rio Tinto (RIO), posted better-than-expected output for the fourth quarter, and said it will press ahead with expansion plans. That’s another positive signal for the industry overall, but my models tell me that VALE is the better play.

Vale is ramping up iron ore production from just over 300 million tons last year to about 470 million by 2015. Its stock yields 3.23% annually. All these factors make it a very compelling buy for deep value investors.

These two stocks are examples of how the new middle class will put an incredible strain on global resources.

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