Investing In Brazil

Brazil's praises certainly haven't gone unsung by the investment community over the last three years. The country's economy barely even blipped when the global economy came to a standstill in late 2008 and early 2009, and it's more than made up for it since then. For instance, the country's GDP growth in 2010 was an enviable 7.8%, and it's expected to grow another 4.5% in 2011.

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The broad numbers alone paint a very bullish picture for investors seeking undiscovered opportunities. But, as is the case with most macro trends, the devil is in the details. Pinpointing exactly where and why Brazil is hitting its critical mass is the key to getting the most out of the megatrend.

At the Heart of Brazil's Rise
In that light, there are three specific Brazilian trends that investors should focus on first.

1. Like China, Brazil's growing consumer class (the middle class is now 50% of the country's population) is just now getting a taste of consumerism, and they like it.
   
   
2. Also like China, the infrastructure needs to be modernized, for a lot of reasons. One of them is simply that if it's not, the country will outgrow itself, its buildings, its utilities and its capacity. This also has to happen soon, as the 2014 soccer World Cup and the 2016 Summer Olympics will be held in Brazil.
   
   
3. Brazil has a whole lot of what the rest of the world wants - oil. The country struck black gold in 2008 when it found one of the world's largest oceanic oil fields in the Pre-Salt area off its coast. Brazil doesn't even need it though, as the country become oil self-sufficient in 2009 thanks to 85% of its power needs being met by renewable sources. Ergo, the bulk of that oil can be exported, and it's all controlled by one (partially government-owned) company called Petroleo Brasileiro, though you may know it better as Petrobras (NYSE:PBR).

Though other dynamics are obviously in play, these are the core reasons Brazil is quickly coming into its own.

How to Invest in Brazil
To be clear, lots of companies will benefit from the industrial maturation of the country. Some will just do it more than others, largely feeding on the three core trends above.

Gafisa S.A. (NYSE:GFA) is apt to be one of them. This residential construction name has already seen its top and bottom line swell back to pre-recession levels (if not beyond them), and as the ranks of wealthier consumers grow, so too should profits for Gafisa.

The growing need for infrastructure touches many industries, including housing, utilities, oil drilling, and oil refining just to name a few. The one common element among all of those groups is the need for steel to build such an infrastructure. That's good news for a company like Gerdau S.A. (NYSE:GGB), which supplies steel for a variety of purposes.

Though Gerdau has yet to reclaim its profit levels seen in 2008, it's getting there. Better still, we've seen the company top earnings estimates for three straight quarters now; the market may be underestimating Gerdau's foreseeable future as well.

And lastly, the massive oil find in the Pre-Salt region may make Petrobras seem like the no-brainer choice. And, it may well be. The country's government has taken strong measures to make sure the bulk of the drilling and refining work is done by Brazil's own companies though, rather than foreign help. As such, a company like Ultrapar Holdings Corp. (NYSE:UGP) may be a solid choice.

It's certainly not cheap, priced at 20.5 times trailing earnings. Once Pre-Salt production hits its full stride after 2015 though, look out above.

Bottom Line
In all three cases, it's unlikely investors will see explosive growth in the short run; each of these companies are poised to make measured progress over the next several years within one of three megatrends. The underpinnings of that long-term growth, however, are bigger than what investors may find anywhere else whether it's with these stocks, or just related ones. Either way, patience is still poised to pay off big-time for Brazil's investors. (Long-term energy outlooks suggest a fundamental energy shift to natural gas. To learn more, see Natural Gas Forecast.)

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