Stocks That Almost Made The Cut: December 2006

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December 7, 2006 | S.T.A.M.T.C | | Author Asif

The Bombay Stock Exchange (BSE) Sensex is approaching an all time high of 14,000 and the 3,000 point correction in May appears to have been no more than a hiccup and a good buying opportunity. However the Indian stock market has more than doubled over the last two years and has in fact more than quadrupled over the last four years. Can you imagine how nervous investors would get if the Dow (DJIA) were to rise from its present level of 12,278 to about 50,000 over the next four years? However this nervousness seems to be largely absent in India because the market has been driven higher by strong fundamentals as witnessed by the 9.2% growth in third quarter Gross Domestic Product (GDP) and burgeoning corporate profits. Infosys (INFY) reported a 44.2% jump in third quarter profits and SINLetter pick Tata Motors (TTM) posted a 43.1% increase in November 2006 sales.

India’s state controlled pension plans called “providend funds” are currently not allowed to invest in the general stock market and there is some speculation that these rules might be relaxed in the future, fueling the market higher. However at these levels I am a little concerned and hence have pared back positions in IT companies like Wipro (WIT) and Infosys (INFY) from my personal portfolio and the SINLetter model portfolio while still retaining positions in Sify (SIFY) and Tata Motors (TTM).

Looking beyond India and China, I started considering a couple of companies from natural resources rich Brazil and Chile for the December 2006 edition of SINLetter. Like India, Chile has a mandatory pension program (PDF link) but allows up to 37% of funds to be invested in publicly traded companies and surprisingly up to 20% in hedging instruments. The Chilean pension program has been a role model for the rest of Latin America and the country also has the highest nominal GDP per capita in Latin America.

Apart from benefiting from the recent run-up in commodities like Copper and Zinc, the country also has a strong agricultural industry. GDP grew 6.3% in 2005 and is expected to be a more moderate 4.75 to 5.25% in 2006. The Chilean companies I was considering were the banks Banco De Chile (BCH), Banco Santander Chile (SAN) and the airline company Lan Airlines (LFL). All three are American Depository Receipts (ADRs) that trade on the NYSE.

Another option to investing in individual Chilean companies is the closed-end fund Chile Fund (CH), which is currently trading at a 1.53% premium to Net Asset Value (NAV). While the Chile Fund distributed a very large dividend last December (and hence its dividend yield of 18.9% according to Yahoo Finance), the distribution is likely to be much smaller this year. Since I am considering buying this fund in a taxable account, I may wait until after the ex-dividend date and the corresponding drop in price to pick up this fund. But I digress.

I also considered the Brazilian aircraft manufacturer Embraer (ERJ) as a potential candidate for the December edition of SINLetter. Apart from a strong Latin American market for its aircraft, Embraer’s jets are used by regional U.S airlines like Skywest (SKYW) and JetBlue (JBLU). Embraer released its long-term outlook in November and the glimpse into Embraer’s future looks promising.

While both Embraer and the Chilean stocks looked very interesting, WisdomTree (WSDT.PK) and the red hot ETF sector were more appealing to me and I decided to let Chile simmer and cook on the back burner a little longer.

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