Hey, there are stocks beyond the headlines from China, Europe, and the U.S.--here are 6 from elswhere

05/04/2012 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

So what’s happening everywhere else in the world?

Eyeballs are glued to the euro/Spanish/French/Greek debt crisis. Investors are shifting every data dump from the Federal Reserve, the Bureau of Labor Statistics, and corporate earnings in the hope of figuring out if the U.S. economy is slowing—and 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 to lead to the next round of stimulus from the People’s Bank of China.

But what about the rest of the world? What stock markets and what stocks should investors be watching—and maybe putting some money into--that aren’t Europe, or the United States, or China?

Investing somewhere besides the markets 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, the likelihood is that it will take down everything. If China really hits a hard landing—with 5% growth and increased social unrest, for instance—it’s unlikely that you’ll be able to find safety—let alone profits—in one of the world’s other financial markets. One lesson from the post-Lehman crisis is that if it’s a big enough crisis, everything heads down at once.

If on the other hand, these potential crises don’t either turn into great big crises or really into a crisis at all, then the “everywhere else” markets could be either 1) profitable ways to leverage a positive result from any of the world’s headline grabbers, or 2) 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. And 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 prone to go into intensive care if monetary policy in Beijing turns frosty. The iShares MSCI Australia Index ETF (EWA) 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 4 banks. Total weighting to those four bank stocks adds up to 30.7%.

I think you’re better off owning just BHP Billiton (BHP) 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 2012. But that would still only bring the stock’s price to earnings ratio to 14.1 or roughly the five-year average at 14.3. That makes the stock cheap on the 16% increase in earnings analysts are projecting for fiscal 2013 and even cheaper if China doesn’t fall as hard as is now expected by commodity markets or recovers faster than financial markets now project.

Want to leverage faster than expected growth in the United States? My suggestion is think Mexico. The Mexican economy is already growing faster than that of the United States: first quarter GDP growth for Mexico came in at 4% versus 2.2% for U.S. GDP. And any acceleration in the U.S. will keep that growth rate up there.

And if you really want leverage to the U.S. 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 truck load of debt to expand in the U.S. market via its acquisition of Rinker in 2007 just as the global economy headed south. And CEMEX isn’t out of the woods yet—it has a daunting year-end leverage target to meet that will require further asset sales.

But it looks like 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 was enough to reduce the company’s net loss for the quarter to $26 million from $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 $7.22 they are back to where they were on July 25, 2011. CEMEX traded at $30 a share before the global financial crisis.

My last choice for a leverage market is Canada and for a leverage stock Potash of Saskatchewan (POT). Potash is leveraged both to the U.S. economy where the U.S. Department of Agriculture has projected a 4% increase in corn planting this year from the 2011 level, and to China where recent contract settlements with Chinese buyers have stabilized prices. I added Potash to my 12-18 month Jubak’s Picks portfolio on April 4 http://jubakpicks.com/ .

The world’s diversification markets, my second group, are concentrated in Latin America. This group is made up of stocks from economies that will, of course, do better if the big trains of the global economy are accelerating. But they 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, has cut interest rates to 9% from 12.5% last August in an effort to revive economic growth. The economy grew by just 2.7% in 2011 after growing by 7.5% in 2010. A recent survey of economists by the central bank projected that growth will recover to 3.3% in 2012 and then to 4.15% in 2013.

That pick up in domestic growth plus a big drop in the real, which sank to a five-month low on May 2, will give a big boost to Brazilian exporters. Here I’d look at Brazilian steel-maker Gerdau (GGB), a Jubak’s Picks http://jubakpicks.com/ . The shares were down 42.9% in 2011, but are up 21.6% in 2012 through May 1. Gerdau exports about 40% of its Brazilian production. The company produces about 33% of its steel in its U. S. mills.

To go with Gerdau, I’d pick a more purely domestic Brazilian company. My three favorites, unfortunately, trade only in Sao 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 U.S. markets is Arcos Dorados Holding (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 April 27 low of $17.79. The company is due to announce first quarter earnings on Friday, May 4.

That’s two from Brazil—Gerdau and Arcos Dorados—and for my final stock of six I’m going to recommend one from Chile.

Chile is one of the best-run economies in the world—the finance minister recently said that the country would not issue any 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 has curtailed copper production.

But 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 that I’ve already 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 (YPF), the Argentine government will go after supermarkets. Seems a stretch to me.) Another Chilean company, one with a more export bent, but that also only sells 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 U.S. traded shares, you’re 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 http://jubakpicks.com// )

My list of six from elsewhere doesn’t exhaust the rest of the globe. I haven’t mentioned the Philippines or 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 http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Arcos Dorados, Empresas Aquachile, Gerdau, Lan Airlines, and Natura Cosmeticos as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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