Latin Stocks Offer Great Value, Some Risk

Many notable names in Latin America have been trading down recently. We wanted to find out from Zacks senior Latin American markets analyst Claudio Freitas, CFA if these were stock we should keep away from or consider great value opportunities.

With earnings season winding down, have companies in your coverage performed as expected? Were there many surprises?

In general, second quarter results for Latin American companies were very positive. Most companies posted higher-than-expected results, mainly the telecom and commodities industries. Nevertheless it was not a great surprise since most analysts, including myself, were expecting positive results.

However, we have been through weird times recently and the fear of the near future, mainly in the commodity sector, is so huge that the great results were not taken seriously and the shares are completely undervalued. There is a complete disconnect between actual results and expected results for the following quarters.

Has the slowing economy in the U.S. created a drag anywhere in your coverage thus far?

Up to now, the slowing U.S. economy has not reached real economy in most Latin American countries. There were some stocks that were affected like Cemex (CX) in Mexico that has a huge exposure to the U.S. construction market. And the airline companies — Gol (GOL) Tam (TAM) and Lan (LFL) — were influenced by the higher oil prices. Commodity stocks have been depreciating a lot, including oil stocks, mining and steel producers. What is interesting is that stocks like Gerdau (GGB), Petrobras (PBR) and Vale do Rio Doce (RIO) posted their best earnings ever in the second quarter 2008, thus the market is incorporating a terrible short-term scenario for commodities.

What is your near- to mid-term outlook on companies you cover?

In general, the outlook remains positive. I do believe that the recent sell-off in commodities stocks is extremely exaggerated and that an up correction will come sooner or later. The current prices for companies like Vale or Petrobras make no sense; a worldwide economic collapse would be needed to justify current prices. The economic outlook for Latin America is not as positive today as it was in the end of 2007.

Inflation is on rise and so are local interest rates. However there are still some good names out there, so I guess it is time for search for both value and growth in the same stock.

If you have two or three top Buy recommendations at this time, which stocks would they be?

In the commodity business the best name is Vale (RIO). The current price is a great buying opportunity, even though one must be prepared for a considerable volatility in the commodity market nowadays.

Petrobras (PBR) is also very attractive since I do not buy the idea that now oil prices will collapse. There are other companies trading at very attractive valuations like Telemar (TNE), which also has decent growth outlook and a good dividend yield.

What should investors be mindful of before jumping into your industry?

Latin American markets have been through a difficult period in the last two months. It seems that risk aversion is on rise again and that no one out there wants commodity producers anymore. Brazil is considered by most investors as the ultimate commodity producer, including oil, steel, iron ore, agricultural commodities, etc.

The obvious conclusion is that the market is under pressure and that volatility is huge. I believe the fear of the market is exaggerated and that this is a great buying opportunity. However, it is good to keep in mind that one needs to be aware of the risk and the volatility before jumping into Latin American stocks. As my old man used to say no pain no gain…

Posted in Categories: Contributor, External Research, Stocks, USA.

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