3 Ways To Profit From Latin America’s Rising Middle Class

It’s no secret that Latin America is one of the most attractive regions in the world for investors. While investors have previously invested in the region’s abundant natural resources, a rising middle class is creating opportunities for companies that rely on domestic demand.#-ad_banner-#​

Thus, investors should be looking to telecoms, retailers and airlines. 

Telecoms will be big winners in a rising middle-class economy because mobile phones are becoming a necessity. Of course, the middle class will want to shop, so certain retailers will be especially appealing. Finally, the bustling middle class will want to enjoy their newfound wealth by traveling. 

Let’s take a closer look at three of the best companies for capitalizing on these trends.

America Movil (NYSE: AMX )  
Market cap: $82.3 billion
Recent price: $22.97
52-week range: $19.01-$23.85
Payout ratio: 34%
Dividend yield: 1.7%

America Movil is the dominant telecom company in Mexico. (Although Mexico is technically in North America, most analysts and economists consider Mexico a big part of the Latin American economy.) America Movil is controlled by Carlos Slim, the world’s richest man behind Bill Gates, with a net worth of around $72 billion.

Slim is doubling down on America Movil. He is buying AT&T’s (NYSE: T) 8.3% stake for $5.6 billion so that AT&T can proceed with its bid for DirecTV (Nasdaq: DTV)

America Movil has a monopoly in Mexico and controls 80% of the fixed-line business and 70% of the mobile market. The company is selling about a sixth of its Mexican assets to bring its total market share below 50% and appease Mexican regulators. The good news is that these assets will likely bring in more than $10 billion, which America Movil can then invest in its faster-growing businesses in Brazil and Colombia.


PriceSmart (Nasdaq: PSMT )  
Market cap: $2.5 billion
Recent price: $84.14
52-week range: $78.63-$126.64
Payout ratio: 22%
Dividend yield: 0.8%

Known as the “Costco of Latin America,” PriceSmart uses a membership model to offer its members rock-bottom prices on the same merchandise that shoppers would find at a Costco or Sam’s Club. PriceSmart has 33 warehouse clubs in 12 countries and one U.S. territory.

PriceSmart has negligible debt compared with the likes of Wal-Mart (NYSE: WMT) and Costco (Nasdaq: COST). Its return on investment is also above both its major peers. However, PriceSmart has grossly underperformed its U.S. counterparts this year.

Shares have been hit hard twice this year, driven by two straight quarters of missing analysts’ earnings estimates. Fiscal third-quarter earnings came in above expectations — but the company still saw a slight sell-off due to a disappointing 1% growth in comparable-store sales for June. 

But PriceSmart’s business model remains attractive in Latin America. Most consumers in the region like to purchase items in bulk, which has been a big factor in why PriceSmart has achieved success in every country it operates. About 68% of its revenue is generated from Latin America, and another 31% is derived from the Caribbean, with the rest from the U.S. 

Recently, PriceSmart expanded in Guatemala and opened its first location in Honduras. Later this year, PriceSmart will open three new warehouse clubs in Colombia, a fast-growing market for the retailer. These are markets where PriceSmart won’t have a lot of competition.


GOL Linhas Areas Inteligentes (NYSE: GOL )  

Market cap: $1.7 billion
Recent price: $6.06
52-week range: $3.04-$6.94
Payout ratio: N/A
Dividend yield: N/A

This Brazilian airline has been a big winner since I profiled the stock in December. The airline has been one of the prime beneficiaries of fans traveling to Brazil for the World Cup. Over the past seven months, GOL is up 45%, far outpacing its competitors LATAM Airlines Group (NYSE: LFL) and Avianca Holdings (NYSE: AVH):

GOL Linhas has been positioning itself to continue dominating after the World Cup. The biggest move has been its expansion of international routes. The airline just signed a codeshare agreement with Etihad, the national airline of the United Arab Emirates, which means that GOL can sell seats on Etihad flights (and vice versa). GOL Linhas also has codeshare agreements with Delta Airlines (NYSE: DAL) and Air France-KLM (OTC: AFLYY). It has added routes between Brazil and Chile, and from Brazil to Argentina. 

Perhaps more importantly, GOL Linhas has made significant strides toward becoming a more efficient airline. The airline expects to achieve a margin on earnings before interest and taxes (EBIT) of 3% to 6% this year and 7.5% next year. This certainly appears doable, considering the airline had a 10% margin in 2009 and north of 20% before 2007. Its debt load and the weak Brazilian real have crimped profits, but things look to have turned the corner for the airline.

Risks to Consider: One of the biggest risks to investing in Latin America is weak domestic currencies. Even though many businesses have grown, their results come up short after converting to dollars.

Action to Take –> Buy shares of all three, as they are some of the purest plays on Latin American growth. As the region prospers, these companies should as well.

The fact that a company isn’t based in the U.S. doesn’t automatically make it a “risky” growth stock. In fact, if you’re ignoring overseas markets, then you could be missing out on some of the market’s biggest income opportunities. All told, we’ve found 93 companies paying 12%-plus yields — and nearly a thousand more paying above 6%. That’s why we’ve created a special report that tells you everything you need to know about international high-yielders — including names and ticker symbols of some of our favorites. Click here to learn more.