Focusing on Brazil

 | Feb 10, 2012 | 1:00 PM EST  | Comments
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Stock quotes in this article:

VWO

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EEM

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EWZ

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ugp

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cig

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pbr

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abv

Emerging markets have been out of favor since the general market began its decline last summer. The Vanguard MSCI Emerging Market ETF (VWO) and the iShares MSCI Emerging Market EFT (EEM) have been rallying along with the market lately, but are still underperforming the benchmark index.

The same could be said for the iShares MSCI Brazil ETF (EWZO). I checked my scan for Brazil-based companies recently, as oil-and-gas refiner Ultrapar (UGP) flashed price strength that outpaced the wider market.

The stock outperformed the indices in the summer and autumn correction last year. Rather than fall into a steep correction, as many stocks did, Ultrapar formed a shallow consolidation. The stock struggled at times below its 10-week average, but it has been trading above that key price line since early January.

Ultrapar zoomed 7.3% last week in heavy volume. The shares have pulled back slightly from its Feb. 3 all-time high, and have been consolidating in a tight range above their short-term 10-day moving average. The stock may offer a new technical buy point if it clears that previous high of $21.48.

After seeing the strong technicals in Ultrapar, I ran a scan for other Brazilian companies. Companhia Energetica de Minas Gerais (CIG), better known as Cemig, is up 6.8% in February, its fifth month in a row of gains.

On Wednesday, the electrical utility said it would buy a stake in natural-gas distributor Gas Brasiliano from government-run oil company Petobras (PBR). This is an example of a stock that has run sharply higher in a relatively short time. It raced up from its Oct. 4 low and surpassed its previous high of $21.06 this week. Because there has been so much buying in recent months, this is an example of a stock that may be ready for a breather. However, even if it pulls back as some traders take profits after the run-up, its next technical buy point could also be constructive.

Ultrapar has amassed a track record of sound fundamentals, although revenue and earnings both slowed recently. The company is scheduled to report its 2011 fourth-quarter earnings results on Wednesday, with analysts eyeing income of $0.23 per share, down from a year ago. Revenue is expected to be $6.87 billion, a year-over-year increase.

I don't like to enter a stock so close to its earnings report, but it could offer a buying opportunity in the days or weeks following the report.

A Brazilian stock that has been on my radar for months is beverage distributor Companhia de Bebidas das Americas (ABV), most often called Ambev. This stock has also held up better than many others during the volatility in the indices last year. It, too, ran up to a new high this month. Ambev is a megacap, with a market value of around $116 billion. It trades north of 2 billion shares a day.

The stock retreated from its all-time high of $38.43, which it reached on Feb. 3, and has been hovering near its 20-day line. While the technicals have been strong, the fundamentals could be indicating some problems. After several quarters of growth, both sales and earnings showed year-over-year declines in the most recent quarter.

The stock is in a technical buy range right now, but like some of its Brazilian compatriots, has sported strong price appreciation, and could be ready for a longer pullback. But if the price holds above the 10-week average, that could signal an attractive entry point in the not-so-distant future.

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