Before diving into the topic of how to invest in Cuba, as well as why, there are a few interesting facts you should know about Cuba regarding its economic potential. First, let’s rewind the clock. The following three statements pertained to Cuba in 1958:

  • Its workers had the 8th highest wages in the world;

  • More Americans lived in Cuba than Cubans lived in America;

  • Its per-capita income was higher than those of Austria and Japan.

Those are interesting facts, but the key word above is ‘potential.' There are definitely some headwinds to growth, which we'll get to. After all the information about Cuba’s growth potential is covered, it'll be up to you to decide whether or not to invest, and if so, how to invest.

Change of Heart

If you keep seeing headlines about Cuba, but you don’t know what’s going on, President Obama has eased (not eliminated) the U.S. trade embargo with Cuba. This could lead to the trade embargo being eliminated in the future. If that happened, we would have a new emerging market on our hands. (For more, see: Sanctions Between Countries Pack a Bigger Punch than You Think.)

Prior to Fidel Castro coming to power, Cuba was a popular tourist destination for Americans. The original goal of the trade embargo was to get rid of Fidel Castro, but that didn’t happen. Instead, Cuba implemented socialist policies, and as of December 2014, 80%-85% of the economy was controlled by the government.

According to Peterson Institute of International Economics, U.S. exports to Cuba ranged from $330 million to $510 million over the five years preceding June 2015. If the trade embargo were to be eliminated, that number could increase to as high as $4.3 billion. However, as stated above, there are headwinds. (For more, see: Socialist Economies: How China, Cuba and North Korea Work.)

Some Complications

Venezuela is one of the largest suppliers of Cuba’s oil. With the slide in oil, and Venezuela finding itself in a desperate situation, Cuba sees a contraction in that cheap oil supply according to the statement from Raul Castro in July 2016 according to Bloomberg, which could make matters worse, not better.

Another factor is demographics. There’s a reason why China and the United States are the strongest economies in the world: They have the most consumers. It goes deeper than that, of course, but population is a big factor. To put things in perspective, when it comes to emerging markets, China has a population of 1.37 billion according to the World Bank 2015 data; Cuba has just 11.38 million people, and it would be safe to say that there's a dearth of disposable income. Therefore, it’s important not to get too carried away with investment excitement. At the same time, if Cuba becomes what it was in the 1950s, then you could have an opportunity to get in on the ground floor.

A third factor is that not everyone is on board with the easing of the trade embargo, which could hinder investment potential. For example, Marco Rubio, Florida senator, whose parents came from Cuba, is one of the known advocates for reversing the arrangements made by President Obama. President-elect Donald Trump also mentioned that he would consider retracting the latest embargo-related agreements if the Cuban government does not agree with his terms. However, on Wall Street, perception and hope often carry investments further than facts. With that in mind, let’s take a look at a few ways to play the potential economic rebirth of Cuba. (For more, see: Countries with the Highest Ratio of Government Spending to GDP.)

Investing in Cuba

What you have likely read about most is the Herzfeld Caribbean Basin Fund (CUBA), which is comprised of about 60 securities of non-Cuban companies that have exposure to growth in Cuba. It’s a closed-end fund. Therefore, there’s a fixed number of shares. This limited supply can lead to parabolic price-per-share moves when demand increases. You might have missed a big move when news broke of Fidel Castro's death, but that doesn’t mean CUBA will soon head back in the other direction.

Still, with the recent policy change, there might be more upside potential than downside risk. That’s for you to decide, but you need more information prior to making that decision. The largest holdings for Herzfeld Caribbean Basin Fund are:

  • MasTec Inc. (MTZ): 7.63%
  • Copa Holdings SA Class A (CPA): 6.69%
  • Royal Caribbean Cruises Ltd. (RCL): 6.28%
  • Lennar Corp. (LEN): 5.78%
  • Norwegian Cruise Line Holdings Ltd. (NCLH): 4.48%

MasTec is an infrastructure company: engineering, building, installation, maintenance, and similar.

Copa Holdings is the leading carrier in Latin America, with 280 daily flights from Panama City.

Royal Caribbean is a cruise line based in Miami — only 230 miles from Cuba.

Lennar is a residential home builder.

Norwegian Cruise Line is another cruise company based in Miami that includes tours to the Carribean as one of its offerings.

All of the above companies stand to benefit from the elimination of the trade embargo, whether due to increased tourism, consumer consumption, agriculture, or construction. Of course, you can invest in these companies all in one place by using Herzfeld Caribbean Basin Fund, but you can also invest on a pick-and-choose basis. If the latter is the case, then let’s look at some key metrics.

KEY METRICS

Below are key metrics, as of November 28, 2016, for the aforementioned five companies:

Trailing P/E

Profit Margin (ttm)

Return on Equity

Dividend Yield

Operating Cash Flow

Stock Performance

(52-Week Change)

MTZ 3331.82 0.02% 0.11% N/A 233.95M 81.35%

CPA

-22.73

-7.64%

-8.47%

2.59%

464.94M

76.34%

RCL 14.50 14.48% 14.42% 1.93% $2.34 Billion -10.36%
LEN 11.53 8.37% 14.40% 0.36% -$665.69 Million -13.53%
NCLH 15.36 12.52% 14.17% N/A $1.16 Billion -29.35%

Data Source: Yahoo Finance, Morningstar

These companies are in a wide range of industries, so it’s difficult to compare. We can still apply some basic principles. There is a certain similarity in figures for Royal Caribbean Cruises and Norwegian Cruise Line with the first showing a slightly better performance in profit margin, ROE and stock price. MasTec and Copa both appreciated considerably in stock price, but have very low or negative profit margin and return on equity. MasTec stands out with a very high trailing P/E which could be explained both by the price appreciation and the dip in earnings in the past two years. As a whole, the multiples look reasonable, the profit margins are respectable, and the return on equities are all positive except for Copa Holdings SA. In three out of five cases, dividends are offered. Overall, operating cash flow generation over the past twelve months has been positive except for Lennar. And while the stock performances are mixed, past negative returns can be positives in these types of situations because what was once suppressed may uncoil higher due to renewed excitement.

The Bottom Line

You now have all the information you need about the Cuba situation and investment options in case everything falls into place. If you do choose to invest, it might be wise to approach this as a speculative play. If you’re correct, you make a little money that has the potential to compound on itself over the long haul. If you’re wrong, your risk is limited. Please do your own research prior to making any investment decisions. (For more, see: The Power of Economic Sanctions.)

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