An Unexpected Emerging Market Takes Off

Stock Market Video

An Unexpected Emerging Market Takes Off

This Weeks Fortune Cookie

In Case You Missed It

In this week’s Stock Market Video, Mike Cintolo talks about the strengthening market. From a top-down perspective, there’s little to complain about, as the major indexes have acted very well following the early-October buy signal. Individual stocks, however, have been very tricky—defensive stocks are being bought while many potential leading stocks continue to meander. Friday brought some breakouts, though, and Mike presents his list of set-ups should more leaders begin to lift off. Click below to watch the video.

An Unexpected Emerging Market Takes Off

Every investor has a part of the market that they’re familiar with and comfortable in, although some comfort zones are wider than others. Some people naturally migrate toward the stocks in the Dow Jones Industrial Average and others enjoy the fast-moving action of the over-the-counter (OTC) jungle. But whether it’s municipal bonds, bond straddles and strangles, high-tech NASDAQ high fliers or commodities ETFs, there’s a kind of natural attraction that draws investors into certain markets.

When I started writing about emerging markets, if I mentioned emerging markets to most investors, I get a polite, blank stare. And even among those who knew a little bit about emerging markets, suggesting that they actually buy a Chinese (or Indian or Russian) stock got the kind of reaction you see when someone bites into an apple and finds a worm … or, even worse, half a worm.
But that reaction passed quickly when the BRIC stocks (Brazil, Russia, India and China) began climbing the charts. These countries had huge economies, cheap labor, massive natural resources and budding companies that were bringing industrialization, technology and a consumer culture to billions of people.

These days, two of the four BRIC countries (Brazil and Russia) have hit a brick wall and China’s economy is in the headlines every day only because of its many challenges.

So, naturally, I’m worried that I’m going to start getting the blank stares from investors again.
Fortunately, the BRICs aren’t all there is to the emerging markets universe. And when one group hits the rapids, there is frequently another group that’s enjoying calm waters.

Right now, one bright spot in the emerging markets is Mexico, and there’s one company that will help to explain why emerging markets stocks are such attractive targets for investors who can expand their investing comfort zones a bit.

Here’s what I had to say about a company named Volaris in the July 30 issue of Cabot Emerging Markets Investor.

“Volaris (its symbol is VLRS, and its full name is Controladora Vuela Compania de Aviacion), is an ultra-low-cost airline that operates 230 daily flights to 39 destinations in Mexico, 22 cities in the U.S. and selected points in Central America. Volaris provides passenger, freight and mail services in Mexico and internationally. The company began operations in 2006 with the intention of offering the lowest fares in the country. Its target customers are people who are visiting family and friends and relatives and cost-conscious business travelers, a market segment that is switching from bus transportation to air travel. The company’s fleet of 53 Airbus aircraft is the youngest in Mexico.

Like all airlines, Volaris is getting a big boost from the continuing low cost of oil, which is keeping fuel costs in check. Estimates for the company’s 2015 earnings are up 141%, from 41 cents per share in 2014 to 99 cents in 2015.

The company’s Q2 earnings report on July 27 featured a 48% increase in non-ticket revenues, a side benefit of very low ticket prices. Revenue grew just 2%, but earnings were up from a four-cents-per-share loss in Q2 2014 to a 22 cent profit.

With a P/E ratio of just 12 and a price just over 13, VLRS is a bargain stock. It’s slowly building its roster of institutional supporters, up from 23 in Q3 2014 to 38 in Q2 2015.

The stock itself has performed well this year, starting the year at 9 and reaching 13.5 in April. After a double-bottom correction to 11.6 in May and earlier this month, the stock moved out to new highs on Tuesday following its quarterly report. The stock’s action since late April provides a three-month base for further advances.”

Volaris is now trading at about 17.5, and is enjoying both the low fuel costs that are benefiting all airlines plus the added advantage of operating in a country that’s bringing air travel to a newly capable generation of airline travelers. Here’s a chart of what VLRS has done in the past year.

The real takeaway of a stock like Volaris is that emerging markets are diverse and full of surprises. When the BRICs are down, Mexico (or some other country) can be up. In fact, right now my market timing system for emerging markets as a whole is positive despite all the negative news.

I’ve been the Chief Analyst of Cabot Emerging Markets Investor for about 10 years, and you might think that I’ve seen it all. That time has encompassed the bursting of the U.S. debt bubble in 2008 and the Great Recession that followed. I’ve guided my readers through the rocketing Chinese bull market of 2006 and 2007 and steered them clear of extended bear phases, preserving capital in anticipation of the next bull period.

If you have room in your comfort zone for carefully selected stocks from unexpected places around the world, I think a trial subscription to my Cabot Emerging Markets Investor can do you a world of good. Get more details here. 

Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

“Scratch a pessimist and you find often a defender of privilege.”—William Beveridge

Tim’s comment: Beveridge was a British economist, best known for his work on social security that served as the basis for the welfare state put in place in England after 1945—so he knew a bit about the challenges of changing entrenched attitudes. In investing, the ability to embrace change is a key attribute of success; in fact, it’s what enables those without privilege to become wealthy!

Paul’s comment: Beveridge’s little observation can be taken a number of ways; here’s mine. Rich people have more to lose, so they worry more. And when you have a lot to lose, everything looks like a threat. On the other hand, if Beveridge, who was a Brit, was talking about the British class system when he says “privilege,” then all bets are off.

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 10/19/15 – One Thing You Can Do to Worry Less About Retirement

Cabot Dividend Investor’s Chief Analyst Chloe Lutts Jensen writes about how knowing exactly what’s going on in your retirement accounts can reduce your anxiety about retiring. Chloe also mentions Cabot’s new retirement investing handbook called A Richer Requirement.

Cabot Wealth Advisory 10/20/15 – Are Commodities a Buy?

Tim Lutts, Chief Analysts of Cabot Stock of the Month, ruminates a bit on artist Rockwell Kent. Tim also looks at whether commodities, which have been beaten down for a while, are worth buying now. Stock discussed: Zillow Group (ZG) and United Technologies (UTX).

Cabot Wealth Advisory 10/22/15 – An Unprecedented Market? Hardly.

Cabot Growth Investor’s Chief Analyst, Mike Cintolo, dips into the history of the 1987 Black Monday stock crash to show that there’s nothing really new in the stock market. Mike says, “Plan your trades and trade your plan.” Stock discussed: Adobe Systems (ADBE).

Sincerely,

Paul Goodwin
Chief Analyst of Cabot Emerging Markets Investor
and Editor of Cabot Wealth Advisory

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