Most investors looking for stocks to buy in 2019 are sticking to the tried and true by opting to own the biggest names on the S&P 500.
However, for those with an adventurous streak willing to accept slightly higher risk, the emerging markets currently provide significant value relative to the S&P 500.
The iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) has a forward price-to-earnings ratio of 9.69, 459 basis points lower than the S&P 500. That’s a 32% discount. Don’t care for the P/E ratio? Well, on a price-to-book basis, it’s trading at a 49% discount. Price-to-sales? 44% discount.
I think you get the point. Emerging market stocks are dirt cheap.
Successful investing means you sometimes have to go elsewhere for above-average returns. Which means you’ve got to eliminate your home-country bias and head overseas where economic growth is accelerating at a much faster pace and value deals are aplenty.
Veteran Fidelity portfolio manager Joel Tillinghast had this to say about Japanese stocks:
“There’s something like 200 U.S. companies in the Russell 2000 Index that have price to earnings under 13. In Japan, there are 1,300.”
While I realize Japan isn’t an emerging market, the same principle currently applies.
If you want cheap gains, here are seven emerging markets stocks to buy.
Source: Maher Najm via Flickr
China: TAL Education (TAL)
While the most obvious buy here would be Alibaba (NYSE:BABA), I’m going to go with TAL Education (NYSE:TAL), one of China’s leading private educational companies. It provides supplemental education to Chinese K-12 students.
I recommended its stock in August 2017 after it went on a 23% run in a single month that summer. Since then, it has gone sideways, despite a good run this past June. Unfortunately, due to some bad apples in the Chinese tutoring market, the government cracked down on the industry, affecting everyone’s stock prices.
In its most quarterly report, TAL earned 21 cents a share, 200% higher than a year earlier. Although analysts have lost some enthusiasm for its stock, 20 analysts have a “buy” or “strong buy” rating on its stock.
As China continues to grow its middle class, companies like TAL, have an opportunity to benefit from that growth. However, to do so, it has to continue to evolve its marketing practices to recruit new students. That’s not a sure thing despite its recent growth.
Like all Chinese stocks, I wouldn’t bet the farm, but a small nibble won’t hurt you.
South Korea: KB Financial Group (KB)
KB Financial Group (NYSE:KB) is one of South Korea’s leading financial institutions. Under the KB Financial umbrella, it operates 12 subsidiaries, including a bank, insurance company, asset and wealth management businesses, and many others.
On Oct. 25, KB announced its Q3 2018 results. Revenues rose slightly up 1.3% to $8.6 billion with a 6.3% increase in net profits to $853.6 million. The company’s fourth-quarter results are out any day now.
While Kookmin Bank saw an almost 4% year-over-year decrease in revenue in the third quarter, its securities business rose by nearly 11% to $1.3 billion. The bank and securities business accounts for 54% of KB Financial’s overall revenue.
Taiwan: Chunghwa Telecom (CHT)
Chunghwa Telecom (NYSE:CHT) is the largest telecom company in Taiwan. It provides Taiwanese customers with fixed-line, mobile, broadband and internet services. In recent years, it has also begun to invest in technology such as artificial intelligence and IoT platforms.
On Jan. 25, it announced an exclusive partnership with Netflix (NASDAQ:NFLX) to promote domestic and international video content in 4k quality to its more than two million multimedia-on-demand customers. The “Netflix Bundle Package” comes with a set-top box and remote control and is expected to grow its customer base.
While Chunghwa gets great Netflix content, Netflix’s partnership with it will allow the video streamer to grab great Taiwanese content for its global audience. It’s a win/win.
A few days after announcing its partnership, Chunghwa released its FY2019 guidance. The company expects to grow revenue in fiscal 2019 by as much as 3.5% to $7.2 billion with a net profit of $1.2 billion. In the mobile market, Chunghwa has a 36.3% market share, one-third more than its next biggest competitor.
In 2019, it plans to spend almost $1 billion on capital expenditures for things like the cloud and mobile broadband.
India: ICICI Bank (IBN)
As emerging markets go, India is one of the most interesting in my opinion, because it has an excellent rule of law compared to China and the like. It also has a fantastic thirst for whiskey despite the fact most of the people in India are teetotallers. In 2014, Indians bought 1.5 billion liters of whiskey, four times the amount consumed by Americans. This stat says everything about the country’s economic potential.
In March 2018, I picked ICICI Bank (NYSE:IBN) as one of the ten best stocks to buy under $10. Although IBN has gone sideways over the past year, I still consider it one of the best U.S.-listed stocks in single digits.
“I believe that India will continue to grow at a faster rate than the emerging markets as a whole,” I wrote last March. “Owning the largest private sector bank in India is a good proxy for benefiting from that growth.”
The bank announced Q3 2019 results Jan. 30 that were very healthy. Its core operating profit increased by 14% to $812 million, fee income grew by 16% in the quarter, and its net interest margin was 3.40%. By comparison, JPMorgan’s (NYSE:JPM) net interest margin is 3.07%, 37 basis points less.
ICICI isn’t a good Indian bank. It’s an excellent global bank that can keep up with any U.S. financial institution.
Brazil: Azul (AZUL)
Brazil is one of many South American economies that I find very exciting. Sure, the news from Venezuela makes investors nervous about committing investment funds to nations that seem to view the rule of law as if it were written on toilet paper, but despite this, the potential is enormous.
Of all the emerging markets in 2018, Brazil had the second-best performance up 18.5% in U.S. dollars and 12% excluding currency, behind only Argentina, which gained 21.1% in U.S. dollars and local currency.
Azul (NYSE:AZUL) is the largest airline in Brazil if you go by the number of flights it operates or the number of cities it serves. If you’re familiar with the travel app Kayak, it recently named Azul best Latin American airline.
The company’s Q3 2018 results were a thing of beauty.
Operating revenues rose 22.6%. It had positive operating income despite a 25% devaluation of the Brazilian Real and a 47% increase in fuel prices. Meanwhile, passenger traffic increased by 20% year-over-year, with a load factor of 83.7%, 60 basis points higher than a year earlier.
Through the first nine months of fiscal 2018, Azul’s on-time rate was 87.1%, making it one of the top five on-time airlines in the world.
I continue to marvel at how South American companies make money despite crippling inflation. Imagine what would happen if these countries ever got their politics settled.
Source: Renate Dodell via Flickr
South Africa: Mix Telematics (MIXT)
Of all the companies on this emerging markets stocks list, Mix Telematics (NYSE:MIXT) is the one I’m least familiar; that’s not because it’s South African but more likely because it has a market cap of just $410 million. I like an excellent small-cap story as much as the next guy. I don’t write about them that often.
What makes Mix such an interesting company?
It’s a subscription-based SaaS company that provides its transportation customers with on-the-go vehicle asset management software to ensure their fleets don’t disappear. Sure, there’s lots of competition in this field, but it appears to be growing, and that’s all that matters.
In fiscal 2019, Mix expects to generate revenue of $144 million, 87% of which is recurring subscription revenue, the best kind of revenue. On the bottom line, it expects adjusted EBITDA of at least $42 million or 29% of sales.
“Our attractive combination of strong growth and a highly scalable business model is leading to increased cash generation,” said CEO Stefan Joselowitz Jan. 31. “Our results were driven by ongoing robust demand globally for our services from our customers across all verticals.”
In the three months ended Dec. 31, 2018, Mix had positive free cash flow of $4.2 million, 250% higher than a year earlier. Although it has taken 22 years to get to this point, it’s not where you start that counts, it’s where you finish.
I’m very interested in Mix’s future.
Russia: Qiwi PLC (QIWI)
Russia might be equally as tricky as China in terms of investing, but that doesn’t mean there aren’t any opportunities.
Qiwi (NASDAQ:QIWI) is a Russian online payment company. It began life in 1999 selling pre-paid mobile top-up cards. Four years later it introduced push payments, followed by the QIWI digital wallet, money remittance and many other fintech innovations.
I must admit I don’t spend much time in the fintech realm but it is one of the world’s most significant trends, and so it’s crucial to include stocks like QIWI in lists of emerging market stocks to buy whenever possible.
Regarding its financials, QIWI has grown its adjusted net revenue over the past five years 21% compounded annually. On the bottom line, it has increased its adjusted net profit by 17% compounded annually over the same period. Its payment services segment generates approximately 86% of the company’s overall revenue. It’s growing at 20% compounded annually.
If you’re the speculative type, QIWI should be right up your alley.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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