World Tour, Wall Street Style - Brazil

By Stephen D. Simpson, CFA | August 29, 2008 AAA

Ahhh, Brazil. If you're going to do on-the-ground due diligence for international investing, it's hard to do much better than Brazil. But look past the caipirinhas and beaches and there's a growing economy with over 100 million in the workforce and ample natural resources.

Some readers may be surprised to learn that Brazil boasts the 10th-largest GDP in the world and has a rather sizable industrial base. What's more, there are over two dozen Brazilian companies with ADRs listed on American exchanges, and Brazil offers a level of growth (and volatility) that could spice up your portfolio. So let's take a look at a few of these countries. (For the basics of ADRs, read What Are Depositary Receipts?)

The Resource Wonder Twins
Most discussions about investing in Brazil begin with its two resources giants: Petrobras (NYSE:PBR) and Vale (NYSE:RIO). This is for good reason. Both are among the world leaders in their respective businesses and are certainly benefiting from the strong environment for basic commodities. Whether investors can find lasting value in commodity stocks is a topic for another day, but if you're so inclined, these are two good places to start.

Unlike larger global oil rivals like ExxonMobil (NYSE:XOM) or BP (NYSE:BP), Petrobras is posting solid production growth and seems poised to continue to do so. While Petrobras raised a few eyebrows in years past for signing expensive-looking contracts with offshore drillers, those deals seem much lot more shrewd today with oil above $115 per barrel and solid discovery announcements in the recent past.

As for Vale, the central question is the direction of iron ore prices and, underlying that, the Chinese demand for iron ore. If you believe we're in a commodity super-cycle that will last for years, this could be a good one to watch on those inevitable dips and panics.

If you Want to Bank on Brazil
There are also ample options for investors looking to get involved in Brazil's banking sector, as Banco Bradesco (NYSE:BBD), Banco Itau (NYSE:ITU), and Unibanco (NYSE:UBB) all have relatively liquid NYSE-listed ADRs. Banks are often a popular pick for investors looking to add some foreign exposure to their portfolio (particularly in the days before ETFs). They're often some of the largest companies in a given country, and their fate is generally tied closely to the underlying health and growth of the host country.

All three of these banks present solid loan growth and returns on equity at present, but there are risks in valuation and credit losses. Of course, American investors have learned the hard lesson that you don't need to be banking in the BRIC countries to run into credit problems. After all, it wasn't lending to Brazilians that got Citigroup (NYSE:C) or Wachovia (NYSE:WB) into their current trouble. (Learn to break down the walls around researching financial institutions' financials, in our related article Analyzing A Bank's Financial Statements.)

If you Want to Buy Where the Brazilians buy
Should you want to invest in some companies whose profits depend a little more closely on the fortunes of individual Brazilians, you could investigate the likes of Companhia Brasileira de Distribuicao (CBD) (NYSE:CBD), Gafisa (NYSE:GFA) or Perdigao (NYSE:PDA).

CBD is Brazil's largest supermarket operator, with more than 80% of its stores in the cities of Sao Paulo and Rio de Janeiro. While the company has been posting respectable same store sales growth and margin improvements, it competes with Wal-Mart (NYSE:WMT) and that's not to be taken lightly.

Gafisa (a homebuilder) and Perdigao (a diversified meat and dairy company) could both be seen as plays on rising affluence for ordinary Brazilians. There has been a general trend across countries over time that rising affluence leads to demand for better housing and more protein in the diet, and both companies would seem poised to benefit.

And Now it's Your Turn
As is always the case, this is just a launching pad for your own research and due diligence. There are plenty of other worthy Brazilian ADRs to investigate, and I hope to pass this way again as I continue to evaluate foreign stocks for Investopedia readers.

For further reading, check out Investing Beyond Your Borders.

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. How To Find Strong Investments Among Struggling Small Caps
    Investing

    How To Find Strong Investments Among Struggling Small Caps

  3. Bear of the Day: Petrobras (PBR) - Bear of the Day
    Stock Analysis

    Bear of the Day: Petrobras (PBR) - Bear of the Day

  4. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  5. Does Upbeat Housing Data Signal Better 2H for Homebuilders? - Industry Outlook
    Stock Analysis

    Does Upbeat Housing Data Signal Better 2H for Homebuilders? - Industry Outlook

Trading Center