Investing Abroad: Chilean Stocks
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Diversification is the best defense against global uncertainty. Living abroad, that is one truth that I have come to appreciate more and more. With so much uncertainty in Europe and the rest of the world, we sometimes forget that truth. In these times of uncertainty, many investors seek the safety of good US companies, avoiding the rest of the world completely. Diversification means more than just different sectors of the US economy. Diversification also means foreign companies that will protect your portfolio from domestic risk.
The simplest way for individual investors to achieve adequate international diversification is through an ETF. The PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio or the PowerShares FTSE RAFI Emerging Markets Portfolio will give investors sufficient global diversification, with a decent dividend to boot. For investors looking for a more hands-on approach, below are five Chilean companies that might be suitable for a more globally diversified portfolio.
Cencosud (NYSE: CNCO) is the Wal-Mart (or something) of Latin America. Cencosud is a retail conglomerate with operations in Chile, Brazil, Argentina, Colombia and Peru. Their operations are spread out over five business segments; supermarkets, home improvement, shopping centers, department stores and financial services (credit cards). Supermarkets make up the vast majority of Cencosud’s operations, followed in second by home improvement. Cencosud is a great way to play the formalization of the Latin American retail space. Latin American retail, particularly food retail, is still small, local, inefficient and informal. Cencosud will be a great beneficiary of this transition to a more formal retail market. Cencosud’s ADRs only began trading on the New York Stock Exchange in late June, so the company is still very much under the radar for American investors.
Vina Concha y Tora (NYSE: VCO) is the world’s second largest winery, owning vineyards and bottling plants in Chile, Argentina and the United States. Chilean wines are the third more popular wines in the world (behind French and Italian wines). And Vina Concha y Tora is the most popular of the Chilean wines. Vina Concha has great growth potential and equally great wine brands. It does however have a massive negative point. Vina Concha sells roughly half of its wines in Europe. With Europe being the absolute financial mess it is, that is a glaring problem in an otherwise great company. The good news is that their reliance on Europe for revenues has been slowly lessening due to increases in exports to Asia, Africa and the rest of Latin America.
LATAM Airline Group (NYSE: LFL) is an airline carrier operating passenger and cargo services mostly in Latin America. The company is the result of the June merger of the Chilean LAN Airlines and the Brazilian TAM Airlines (with the newly combined company being based in Chile). This merger should give the company various cost savings benefits and synergies as the dominant Latin American airline. LATAM is a very well-run company… unfortunately it is in a very difficult business. The company operates in an industry with high fuel prices, labor costs and generally low pricing power. The merger however should allow LATAM to have greater pricing power, being able to pass those high costs on to their airline passenger and cargo business customers. I am not a fan of the airlines as investments, but LATAM is one of the better companies in this challenged industry.
Banco Santander Chile (NYSE: BSAC) is the independent publically-traded subsidiary of the Spain-based bank Banco Santander. Banco Santander Chile is the largest bank in Chile, capturing about a quarter of the market. Unlike its Spanish parent, Banco Santander Chile is a relatively strong and stable banking operation. The banking environment in Chile is challenging, like almost everywhere else in the world, but Chile and Banco Santander Chile have performed very well when compared to other countries and multinational banks (the United States includes). Shares of Banco Santander Chile are a bit more expensive than those multinational names though. That might say more about people being willing to pay a premium for actual quality and competence in the banking sector (something not usually associated with banking nowadays).
Sociedad Quimica y Minera (NYSE: SQM) is the world’s largest producer of lithium, found in the batteries of cellphone, tablets, laptops, electric cars and other such products. Although they are the largest producer of lithium, their primary business operations are in plant nutrients. As a play on lithium and the worldwide demand for portable consumer electronics or as a play on plant nutrients, the raising food costs and the recent drought around the globe, Sociedad Quimica y Minera is a great company for both. It is, however, relatively expensive when compared to other plant nutrient companies. Sociedad Quimica y Minera trades at 22.85 times forward earnings. Potash Corp on the other hand trades for 12.75 times forward earnings, as well as being projected to grow at a faster rate than SQM. In addition, Potash does own a 32% stake in SQM. Investors may want to look at Potash as a better way to play Sociedad Quimica y Minera.
Are these five Chilean companies suitable for your own diversified portfolio? That I cannot say. Use this list a good stepping-off point for your own research into good companies in Chile and elsewhere in the world. Please contact a tax professional about the suitability of international companies in your portfolio.
WhichStocksWork owns shares of Cencosud S.A. American Depositary Shares. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sociedad Quimica y Minera (ADR). 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.