The Johnny Depp of Closed-End Funds Talks CUBA (part 5)

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Closed-end fund guru Tom Herzfeld discusses Cuba and his most popular fund, the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA).

[Continued from part 4] 

Nick Slepko: By all reports, housing in Cuba is in the toilet, and their toilets are in even worse shape.  What’s your take on Cayman Islands-based water utility Consolidated Water (NASDAQ: CWCO)?

Tom Herzfeld:  Consolidated Water is a very interesting company, but they’ve had a few earnings disappointments and a dispute with the government in one of the British Virgin Islands that has affected its share price. In addition to supplying water in the Cayman Islands they are also in Belize and the Bahamas with a reverse osmosis [desalination] facility and I think their future looks fine.  Although I don’t believe there are any plans on the table for Cuba, considering where they are, why rule it out?

Slepko:  Let’s talk about homebuilding and your positions in Homex (NYSE: HXM) and Lennar (NYSE: LEN).  You have a big position in Lennar and it’s done quite well, but Homex you have a small piece, and it hasn’t done well.  How did you discern between the two?

Herzfeld:  Lennar is a local Florida company that we’re very familiar with and just made a new high this week. Also, I like keeping a substantial portion of the portfolio in the shares of companies that are highly liquid. 

We are already heavily weighted in Mexico, but I became interested in Homex because I thought a Mexican homebuilder could get involved in Cuba– but if they don’t, Mexico is still a Caribbean Basin country and Mexico is a good economy on its own.

As a Mexican homebuilder, Homex could have a leg up in Cuba – though they haven’t done as well as Lennar.  Their total revenue was 12% below its estimate. It also cut its 2012 sales view, saying it expects revenue excluding prison contracts to rise between 3% and 4%, down from previous predictions of 10% to 12%. Lennar has a Cuba plan – though if you talk to them they certainly won’t tell you this. But as a large Florida-based homebuilder, Lennar certainly has plans to go into Cuba, which is in their backyard.

Slepko: When contacted, Lennar’s representative said that the company has no plans to operate outside the continental United States at this time, but reading their reports and looking at their leadership, they could clearly do well in a Free Cuba. 

Herzfeld:  When I started looking at Lennar ten or twenty years ago and I was speaking with local Cubans, they’d say, “Yeah, they got models and everything set up for Cuba.”  But Lennar won’t admit it.

Most US companies are very nervous about talking about their plans with Cuba.  Maybe they’ve already been having talks with the Cuban government, but it’s very sensitive here in Florida.  Just like the high-profile industrial companies, we are very careful about not only sticking to the strict rules of the embargo, but also the spirit of it as well.

Slepko: Why the ticker CUBA?

Herzfeld: Well, when we first thought about the fund it happened on Fisher Island [just south of the harbor entrance of Miami].  We were sitting around just having a drink at the beach bar and one of the fellows (who has passed away since) was a prominent Chicago banker who had worked in Cuba as a young man.  So we asked him why don’t you get involved in starting some kind of fund to invest in Cuba.  He said it was a good idea, but he never really wanted to pursue it.  And I said, “Well, do you care if I do?”  And he said you should go ahead and do it.

So, as we started going through the registration of the fund, we realized if we were going to raise ten, twenty, thirty million dollars, what are we going to do with it?  We couldn’t just put it in the bank.  Then we figured it should be a regional Caribbean fund and then we can earmark those companies that would be strong Cuba plays.

Slepko: Has your company had any problems because of its association with Cuba – maybe not as extreme as the travel agency that got fire-bombed [in May], but still complications because of misunderstandings or opposition?

Herzfeld: No, not really.  Actually, we have many Cuban-Americans that have told me they are investors in Herzfeld Caribbean. Although, when we first launched the Fund I went to Puerto Rico and made a speech at the Casa Cuba [a Cuban-American club in San Juan].  People there thought this fund was really being formed to circumvent the embargo.  At that time, I had my life threatened, but I assured them that they really had it wrong and that the last thing I wanted to do was be in business with the Castro regime.  I told them we would be investing throughout the Caribbean with companies not doing business in Cuba and that were doing well as Caribbean investments, yet these same companies may very well be involved in rebuilding a Free Cuba.  People calmed down, but then I got nervous because I heard the Cuban government had it in for me.

But we’re not political and we have been able to get along well with the whole range of Cuban-Americans…[Cuban-American hardliner and current Chair of the House Foreign Affairs Committee] Ileana Ros-Lehtinen even wrote a university recommendation for my daughter years ago. 

[Continued in part 6]

Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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