Buy CPFL Energia (CPL)

The recent pull back of about 10% in the Brazilian real versus the U.S. dollar has removed some of the currency risk from owning Brazilian utility CPFL Energia (CPL) for its 6.5% yield. And the recent interest rate cut from the Banco Central do Brasil suggests that interest rates are headed modestly lower in the medium term—which is likely to push up the price of income producing utility stocks as investors in Brazil looks for more income. The combination makes CPFL Energia, which trades as a reasonably liquid ADR in New York, an attractive income-producing total return proposition, in my opinion, for a portfolio such as my Dividend Income portfolio http://jubakam.com/portfolios/ . (I included this stock in my recent post “Lemons into lemonade: High yield stocks from today’s market rout for tomorrow’s retirement portfolio” http://jubakam.com/2011/09/lemons-into-lemonade-high-yield-stocks-from-todays-market-rout-for-tomorrows-retirement-portfolio/ .)

CPFL Energia is Brazil’s largest private power distributor with about 13% of the national market. About 75% of operating income comes from regulated electricity sales, which provides a high measure of revenue predictability. (These rates aren’t set for regulatory review until late 2013.) The company’s customer base is concentrated in the traditionally fast-growing Sao Paulo and Rio Grande do Sul states, which gives CPFL Energia a good shot at growing revenue faster than the national economy. Credit Suisse projects 2011 revenue growth at 7.1%.

Many of Brazil’s electric utilities face a price squeeze as new capacity comes on line at a pace that looks like it will outstrip the growth rate of demand. CPFL Energia is well positioned to avoid that problem because it is not only the most efficient distributing company among publicly-listed utilities (with a return on invested capital for 2011 projected at 15.2% by Credit Suisse), but also has contracted just about all of its generating volume for the next 20 years. In addition the company is moving strongly and quickly into alternative energy production. For example, the company has formed a joint venture with Energias Renovaveis to develop wind, small hydro, and biomass projects.

The New-York-traded ADRs (American Depositary Receipts) selling at $24.48 today, September 20, trade near the bottom of their 52-week range of $22.84 to $30.66. The units pay a yield of 6.5%. The only downside, and this may have an influence on your timing, is that the company will pay out its first half dividend on September 30 to shareholders of record as of August 17.

Full disclosure: I don’t own shares or units of any of the companies or partnerships mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post.  The fund did not own shares of CPFL Energia as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Sell Cosan (CZZ)

On September 28 I argued that the odds are good that Brazilian and Chinese stocks will out perform their developed economy peers over the next year on the faster growth rates of those economies. And I said that the best place to be in those emerging markets was the shares of domestically oriented companies. In other words you want to buy shares of companies that sell to prospering Brazilian and Chinese consumers rather than shares of companies that sell for export into the slowing global economy. (See my post http://jubakpicks.com/2011/09/09/are-china-and-brazils-stocks-about-to-race-away-from-slow-growing-developed-markets/ )

Well, since I don’t have a rich uncle who gives me a paper bag of cash whenever I want to buy a stock, buying domestically oriented companies means selling something else. In Brazil right now I think that means selling shares of Cosan (CZZ in New York and CSAN3.BZ in Sao Paulo).

In the short term sugar production in Brazil is down. Output in the first two weeks of August in Brazil’s Center South region, the world’s biggest producing region, fell by 3.4% from the same period last year. The harvest, which stretches from March through November, is on track to be 10% or more smaller than last year.

In the short term the price of ethanol made from sugar faces downward pressure from lower global oil prices. Ethanol competes with gasoline as a fuel in Brazil so lower gas prices convince some consumers to switch.

Smaller production, lower global demand, and pricing pressures don’t bode well, in the short term, for Cosan and its huge Raizen joint venture with Royal Dutch Shell (RDS).

In the long term, however, the tough times for sugar and ethanol producers will help Raizen expand its share of the markets. Read more

Will the superior economic performance of developing economies such as China and Brazil translate into superior stock market returns over the next 12 months?

Or will the dismal performance of the world’s developed economies—as the United States and the European Union slide toward slow to no growth—drag all boats down to the bottom?

In other words will emerging stock markets decouple from developed stock markets in the last part of 2011 and in 2012?

I think that’s the most important question facing stock investors right now.

What’s decoupling? It’s when a stock market dances to its own tune rather than moving in lockstep with other markets or with the global market as a whole.

Decoupling is different—or maybe you can call it an extreme case–from relative out- and underperformance.

We’ve been through a good example of out- and under performance in the last part of 2010. In the fourth quarter of 2010, for example, the U.S. Standard & Poor’s 500 gained 10.8%. The Brazilian stock market, as tracked by the iShares MSCI Brazil Index Fund (EWZ), gained just 4%.

Sometimes the outperformance can be really extreme. From December 31, 2010 to its peak on April 29, 2011 the S&P 500 climbed to 1364 from 1258. That’s a gain of 8.4%. From December 31 to April 29 the MSCI Brazil Index Fund went from $76.23 to $76.55. That’s a gain of 0.4%.

But even then the two markets moved in the same direction—even if just barely.

Pure decoupling is different—and rarer. Like what happened in 2007. That year in the fourth quarter the S&P 500 went down by 3.6% while the Brazil Index Fund went up by 11.4%. For the year the S&P finished ahead a paltry 4.9% and the Brazil Index Fund was up 74.8%.

Could we see that kind of decoupling in the remainder of 2011 and in 2012? (Or even just extreme out performance?)

The economic growth trends give decoupling a good chance. Read more

Faster growth than McDonald’s but Arcos Dorados faces some unusual risk too

Just looking at growth rates, if you want to load up your portfolio with Big Macs, you should buy Arcos Dorados (ARCO) instead of McDonald’s (MCD). On August 1the largest McDonald’s franchisor in South America reported second quarter earnings of 7 cents a share, four cents a share above analyst estimates. Revenue climbed by 28.7% from the second quarter of 2010. (The company only went public back in April 2011.)

For all of 2011 the company told investors to expect revenue growth of 22% to 24%–up from prior guidance for 15% to 17% growth—and net income growth of 35% to 45%.

Sure beats the 11.3% earnings growth that Wall Street analysts are projecting for McDonald’s in 2011.

No wonder McDonald’s is trading at 17 times projected 2011 earnings and Arcos Dorados trades at 31 times earnings. That’s a PE to earnings growth rate ratio of 1.5 for McDonald’s and .89 for Arcos Dorados (using the lower end of the company’s 25% to 45% net income projected growth rate.)

Time to snap up some shares, right, even though the stock has rebounded to $24.91 as of 1:00 p.m. New York time today, near the top of its 52-week range, from $22.03 on August 8 and $19.98 on July 18.

Well, not unless you understand exactly how tough a battle Arcos Dorados faces fighting inflation in Argentina and Brazil. Read more

Update Itau Unibanco (ITUB)

Want to know why Brazil’s stock market was the first global market to fall into a bear? You can see the reasons for the fears that have been crushing Brazil’s stocks in the August 3 earnings report from Itau Unibanco, for my money Brazil’s best-run bank. (Itau Unibanco is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ )

The company announced that for its second quarter net income climbed 14% from the first quarter in 2010. Adjusted earnings per share, which exclude one-time items, were 73 centavos a share. Analysts had been expecting adjusted earnings per share of 82 centavos so the bank missed estimates by almost 11%.

The problem with the quarter wasn’t loan demand. Read more