3 Emerging Market Stocks Trading at Big Discounts

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  • As the markets continue to churn higher, the performance of the S&P 500 has slowed as the volatility has remained high. As a result, the market as a whole is maintaining its level of risk without the same reward that he presented in March. More of its performance is resting on the shoulders of fewer stocks that are fairly extended in the short and intermediate term.

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  • As a stock picker, it’s important to find areas where the risk and reward proposition is more positive. One of the areas where this is best exhibited is with emerging markets. The current Year-to-date performance of the iShares MSCI Emerging Markets ETF (EEM) a loss of nearly 18%. Compare that to the S&P 500 that has a loss of just over 7% and you see a difference in which market is relatively more overbought.

    As you begin to consider valuation, it becomes increasingly more clear that the emerging markets are trading at a much better valuation. For example, incorporating valuation measures like price-to-sales (P/S) and price-to-book (P/B) narrows the list significantly. Then adding profitability metrics like return on equity (ROE) and operating margins, liquidity ratios like the current ratio and leverage ratios like debt-to-equity (D/E) you start to come up with a fairly exclusive list of only 11 companies, with nearly half of them emerging market companies and the top three coming from Latin America.

    Here’s the list of the top three emerging companies with a P/S less than 2, a P/B less than 3, ROE greater than 15%, operating margins greater than 15%, current ratio greater than 1, and D/E of less than 1.

    Emerging Market Stock #1: Centrais Eletricas Brasileiras SA (EBR)

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  • EBR is the largest energy company in Latin America. They are a Brazilian utility company that uses thermal, nuclear, wind and hydroelectric plants. They are tentatively set to announce their earnings this week on May 28 but has not specified a time. Like many companies, utilities are not immune to the issues surrounding the COVID-19 closures. Current estimates are for a 20-40% decline in consumption this year.

    EBR has generated operating margins of 26.4% and ROE of 17.32%. The current ratio is 1.59 with a D/E of 0.7. From a valuation standpoint, the company is trading at a P/S of 1.29 and a P/B of 0.51. This is a company that is very well managed with great growth prospects but is trading at a deep discount. The near-term target is $7.50 and is based on the 61.8% retracement of the sell-off this year.

    Emerging Market Stock #2: Pampa Energia SA (PAM)

    PAM is an Argentinian integrated electricity company. Beyond electricity, the company has segments in oil and gas among other holdings. They announced their 1Q earnings on May 12, which was hurt by a 35% decline in power generation, an 18% decline in electricity distribution, 25% decline in oil and gas and 5% decline in petrochemicals. However, the company was still able to produce a 5% increase in adjusted EBITDA for the quarter.

    EBR has generated operating margins of 15.51% and ROE of 37.26%. The current ratio is 1.65 with a D/E of 0.95. From a valuation standpoint, the company is trading at a P/S of 0.54 and a P/B of 0.72. This is a company that is trading at a deep discount. The near-term target is $17.50 and is based on the retest of the December 2019 high.

    Emerging Market Stock #3: Companhia Energetica de Minas Gerais (CIG)

    CIG is another Brazilian utility company. Similar to PAM, the company was affected in Q1 because of lower consumption, particularly in their industrial consumer category and captive client category. For both of those segments, consumption was down 3% and 26.3%, respectively. The company did post a net loss of $56,846 in Brazilian Real but was largely due to Eurobond debt and hedges.

    CIG has generated operating margins of 15.63% and ROE of 28.48%. The current ratio is 1.16 with a D/E of 1. From a valuation standpoint, the company is trading at a P/S of 0.59 and a P/B of 0.97. Similar to the other two companies, CIG is a company that is trading at a deep discount. The near-term target is $2.85 and is based on the 61.8% retracement of the sell-off this year.

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