"Bolsa de Valores, Mercadorias & Futuros de Sao Paulo"
You may not know this Portuguese title. You may not even know it by its shortened moniker, "The Bovespa." But you should. This is because it is the equivalent of Wall Street for South America. Indeed, the Brazilian stock market -- the Bovespa -- is now the largest stock market in the entire Southern Hemisphere. And by 2035, it could well be one of the largest stock markets in the world. [See my predictions for the top 8 world economies by 2040]
For a while, it looked like many investors missed out on a golden opportunity. The Bovespa doubled in a matter of just two years.
But patience is a virtue, and for those that missed the stunning upward move, a second chance has just arrived. The global stock market rout dragged the Bovespa back down, not to the levels seen in 2008, but well below the peaks hit in 2010.
This index may be down roughly 20% from the peak, but a host of great Brazilian companies have taken an even deeper bruising. Here are five Brazilian stocks and funds that trade in the United States through American Depositary Receipts (ADRs). These investments have long been on my wish list, but were too expensive. Not anymore...
1. Embraer (NYSE: ERJ)
: $4.76 billion
Fall from : 26%
The Brazilian maker of regional jets for global airlines and armed services has long toiled in the shadow of industry leaders Boeing (NYSE: BA) and Airbus. This shadow has proved a nice place to be. Embraer has steadily built a head of steam behind those two titans, morphing into one of Brazil's largest employers. Sales hit $2 billion for the first time in 2000, broke the $3 billion mark in 2004, the $5 billion mark in 2007 and could hit $6.5 billion by next year.
Embraer doesn't go head-to-head with Boeing and Airbus on large wide-body planes. Instead, a tight focus on smaller, single-aisle planes has helped carve out a strong role with airlines looking to serve short-haul routes. JetBlue (Nasdaq: JBLU) has been adding Embraer jets to its fleet to handle smaller markets where the tried-and true Airbus 320 is just too large.
This stock isn't just a play on Brazil, North America and Europe. At a recent ai show, Embraer landed new contracts to deliver planes to Kenya, Indonesia and Kazakhstan. The aircraft maker is well on its way to becoming a household name on every continent. Embraer's backlog of planes yet to be delivered stands at 1,003 as of the end of June. The recent steady drop in Embraer's stock has pushed it down to just 10 times projected 2012 profits.
2. Petrobras (NYSE: PBR)
: $173 billion
Fall from : 38%
This Brazilian oil giant has lost $100 billion in market value since March 2011. That's a lot of dough. The sell-off is the result of a drop in oil prices, slightly stricter government policies regarding oil and gas royalties, and recent moves to issue more stock and debt to help fund business development. (Though the company now vows to stop issuing any more equity.)
Indeed, this company has been sucking in cash for quite some time, generating a cumulative $40 billion in free cash flow loss in just the past two years. Pretty soon, though, losses will morph into outsized profits when the company's heavy investments to tap massive offshore oil fields finally bear fruit. In 2007, 2008 and again in 2009, Petrobras discovered three new offshore oil fields, known as Tupi, Jupiter, and yet-to-be-named site off of the state of Sao Paolo.
It's the Tupi energy play that should pique your interest. It's the largest new find of oil since the Kashagan oil field was discovered in Kazakhstan in 2000 and instantly put Brazil's oil reserve base on par with industry giant Norway. Tally up all of its fields, and Petrobas' engineers estimate the country is sitting on more than 12 billion barrels of oil.
3. CPFL Energia S.A. (NYSE: CPL)
: $12 billion
Fall from : 38%
Utility stocks and growth stocks are rarely mentioned in the same sentence. Yet when it comes to Brazil, growth is everywhere. Even this regional power provider is posting solid growth in tandem with a fast-growing middle class. Sales grew from $8 billion at the end of 2006 to $12 last year. Profit growth hasn't kept pace, largely because the company is still investing heavily to expand capacity. When those investments catch up, CPFL will finally be able to boost its dividend, which has been stuck around $1.30 a share for each of the past three years. That's good for a 5% yield now, and likely a higher dividend yield when the current capital spending program winds down.
4. Companhia Siderurgica Nacional (NYSE: SID)
: $14 billion
Fall from : 48%
Construction cranes dot the skyline of many major Latin American cities as countries spruce-up their business districts to better reflect their rising economies. Many of the buildings are being built with Brazil's CSN, which is the continent's largest standalone steel maker. Yet the global sell-off in steel stocks has taken CSN down in sympathy, and shares now trade for roughly 40% below the February 2008 IPO price.
5. iShares MSCI Brazil Index (NYSE: EWZ)
Fall from 24%
Instead of finding the right Brazilian stock, why not buy the whole basket of them? This exchange-traded fund (ETF) carries a 0.6% expense ratio and eliminates company-specific risk while focusing on all the major Brazilian industries, from agriculture to finance to retail. The recent 24% drop just put this ETF into the "on sale" bin.
Risks to consider: Emerging market stocks really take it on the chin when global markets plunge, so any investment in Brazil now could turn sour if the U.S. and European markets plunge to fresh lows.
Action to Take --> such as Brazil have had great runs before, only to see them eventually peter out. Yet the boom-and-bust cycles are a thing of the past. Government finances are now much better managed in terms of fiscal and monetary policy. It's unclear where Brazilian stocks will trade in this uncertain economic environment, but it's completely clear that these are great companies with fantastic long-term potential and are poised to be worth lot more in five or 10 years.