4 Brazil Stocks To Buy On An Improving Economy

Till recently, the only bright spot for Brazil seems to be the successful conclusion of the Rio Olympic Games. A tough win in the national favorite, football and an unprecedented victory in the pole vault contest gladdened the heart of international spectators and citizens alike. The country’s economy may not be in a position to perform similar feats, but things have improved considerably in recent times.

Signs are already evident that the economy is getting its act together. Several economic indicators are improving even as prospects for select emerging markets, such as Brazil, improve. At this point, picking stocks from Brazil may make for a smart investment choice and involve a lower degree of risk than before.

Economy Turns Over New Leaf

To be fair, doubts over the state of Brazil’s economy have not disappeared completely. However, some key economic indicators have improved, giving rise to optimism about the state of things. For instance, manufacturing investment has witnessed a pickup. In June, capital goods imports increased 18% in dollar terms on a yearly basis. This is the first year-over-year increase recorded since Sep 2014.

Additionally, industrial production increased in June, marking the fourth consecutive monthly increase following two back to back years of near continual declines. Inventories of unsold goods are falling and the decline of trucks on motorways has ceased.

Political Crisis Nears Resolution

Equally important for the country is its perception as far as global investors are concerned, especially when it comes to issues like corruption in high places. While funds continue to flow in due to several global factors, the office of the country’s president has been mired in controversy for some time now. However, things are set to change now as impeachment proceedings are due to begin against former president Dilma Rousseff on Aug 25.

Even more crucial has been the diametrically different approach of her successor, acting president Michel Temer, especially when it comes to economic issues. Equity markets have experienced resurgence ever since Temer took charge in May. Perceived as being more industry friendly, his pragmatic approach in dealing with the country’s congress has been refreshing. Additionally, he has held out the promise of several economic reforms, which are likely to boost market confidence.

IMF, Moody’s Revise Views on Economy

Meanwhile, the world at large is changing its views on Brazil’s hitherto embattled economy. After lowering its growth projections for Brazil on several occasions, the IMF has recently revised its GDP estimate for 2017 upward. The IMF now thinks that Brazil’s economy will grow by 0.5% next year. This is significant, since the agency had estimated in April that no economic expansion would take place.

Additionally, Moody’s revised its outlook for the biggest emerging economies last week. The ratings agency now expects that select emerging markets will grow at a faster clip this year and in 2017. While growth has been revised downward for Turkey and South Africa; Russia, China and Brazil are expected to grow at a faster pace.

Our Choices

Brazil’s domestic economic indicators are showing significant improvement even as global perceptions about the country are improving. Its willingness to resolve corruption issues is adding to the growing positive sentiment about the economy.

This is why you would not go wrong by investing in select stocks from Brazil. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE:SBS) or SABESP, provides public water and sewage services in the state of Sao Paulo, Brazil, which includes Sao Paulo, one of the largest cities in the world.

SABESP has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 11.46, lower than the industry average of 23.20. Its earnings estimate for the current year improved by 12% over the last 30 days.

Companhia Energética de Minas Gerais S.A. (NYSE:CIG) or Cemig, is engaged in the generation, transmission, distribution and commercialization of electric power.

Companhia Energética de Minas Gerais has a Zacks Rank #2 and a VGM Score of A. It has a P/E (F1) of 11.12, which is lower than the industry average of 18.27. Its earnings estimate for the current year improved by 8.3% over the last 30 days.

Ultrapar Participações S.A. (NYSE:UGP) or Ultrapar, is one of the largest distributors of liquefied petroleum gas in Brazil and a leading producer of petrochemicals and chemical.

Ultrapar Participações has a Zacks Rank #2 and a VGM Score of A. Its earnings estimate for the current year improved by 5.4% over the last 30 days.

Fibria Celulose S.A. (NYSE:FBR) or Fibria, is a paper product company which produces bleached eucalyptus pulp exclusively from renewable plantation.

Fibria Celulose has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. It has a P/E (F1) of 4.95, which is lower than the industry average of 13.57. Its earnings estimate for the current year improved by 25% over the last 30 days.