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Monday, October 7, 2013 - 10:00

2 Double-Digit Emerging-Market Plays For Value Investors

Monday, October 7, 2013 - 10:00am

Value investors tend to be conservative, while emerging-market investors are often thought of as aggressive.

Many investors place these limits on themselves. Value investors might only consider dividend-paying large-cap stocks, for example. In doing so, they could be severely limiting their profits.

When looking at emerging markets recently, we noticed two countries offering deep discounts.

Value is usually found in a country's stock market when the economy turns down. That is certainly true for Thailand. The country is in a mild recession after two consecutive quarters of GDP contraction. Economists expect the recession to be short-lived and are expecting Thailand to recover in the second half of this year.

Historically, the end of a recession has been a profitable time to buy because stocks are trading at bargain levels and the recovery should help prices recover quickly. IShares MSCI Thailand Capped Investable Market ETF (NYSE: THD) is trading with a price-to-earnings (P/E) ratio of 10, well below the exchange-traded fund's five-year average near 15.

The monthly chart shows that THD is oversold on a technical basis. Prices closed below the 10% price channel and signaled a buy when they moved above the lower channel line. The upper channel line near $90 is now the price target, offering a potential gain of 16%. Risk can be limited with a stop-loss order below the lower channel line at $73.90.

On the short-term charts, THD confirms a buy with a stochastic buy signal appearing on the daily chart.

Action to Take -->

-- Buy THD up to $80
-- Set stop-loss at $73.90
-- Set initial price target at $90 for a potential 12.5% gain in six to 12 months

India is also in the midst of an economic turnaround, according to forecasts. The country has averaged GDP growth of 8% over the past decade, but growth slowed to only 5% last year. This year, government officials expect growth to reach 5.3%.

As GDP growth slowed, stock prices fell. The holdings of the WisdomTree India Earnings ETF (NYSE: EPI) are now trading at an average P/E ratio of 10.

From a trading perspective, EPI is also giving a buy signal on the monthly chart. The daily stochastic is confirming the buy. The price target based on the monthly chart is $18.67, about 18% above the recent price. The lower channel line is at $15.27, too close to the current market price to be used as a stop-loss level.

Instead of managing risk with a stop-loss order, we can use call options as a risk management tool. A call option gives the buyer the right to purchase 100 shares of a stock or ETF at a predetermined price (the strike price) before the expiration of the option. For EPI, an option with an exercise price of $15 expiring in January 2015 is trading at about $2.35.

The maximum risk a call buyer faces is the amount paid for the option, or about $235 in this case, since each option covers 100 shares. A stop-loss order can also be used with an option.

If EPI reaches the target of $18.67, this call option would be worth at least $3.67. Instead of exercising the option and buying the shares, you could close the trade and take a profit by selling the call option back. You could also sell the option to limit the size of a loss if the price of EPI falls.

Options can increase the size of a gain on a percentage basis, and in this example, the calls could provide a gain of 56% in 14 months.

Action to Take -->

-- Buy EPI Jan 2015 15 Calls at $3 or less
-- Set stop-loss at $1.50
-- Set initial price target at $3.67 for a potential 22% gain in 12 to 14 months

Emerging markets offer value that should be attractive to many investors. If the economies of Thailand and India are bottoming out, these trades could be among the biggest winners in the next year.

This article was originally published at ProfitableTrading.com:
These Two Emerging Markets Are Perfect for Value Investors

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Amber Hestla, Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.