The top 10 Latin American stocks powering elite investors' funds

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Traditionally Latin America’s markets are regarded as plays on commodity prices. However, elite fund managers’ biggest bets in the region tell a different story.

They showcase the diversity on offer, with leading companies spanning finance, retail software, infrastructure and even breast implants. Each of the 10 stocks represent elite fund managers’ highest conviction positions in the region, as measured by our unique methodology.

On trend

The retail plays and finance companies on the list link most clearly with Fix the Future’s social and demographic change megatrend and more specifically the theme of emerging prosperity.

The strong sustainability commitments of miner Sociedad Quimica Y Minera De Chile tap into the theme of resource efficiency. This, and emerging prosperity, also play a key role in the fortunes of airport owner Grupo Aeroportuario del Sureste, alongside migration and relocation trends.

Meanwhile, IT firm Totvs provides a way for investors to play Fix the Future’s technological change megatrend and the theme of digital infrastructure. And Establishment Labs is set to benefit from trends linked to health and longevity.

Let’s take a closer look at the companies.

Shop until you drop

MercadoLibre operates a massive online marketplace across Central and South America and is the region’s most widely held stock among elite fund managers. The business has been growing at eyewatering speed, achieving a compound average sales growth rate of 53% over the last five year.

The first quarter of MercadoLibre’s current financial year saw a 32% year-on-year increase in the gross value of goods sold to $7.7bn. Total revenue in the period hit $2.2bn.

As well as retailing, the company is rapidly growing its fintech operations, which include electronic payments and consumer credit. It has 36 million users of its fintech services and a $2.4bn credit portfolio.

While sales are impressive, until recently profits have been elusive. MercadoLibre’s growing size is boosting its gross margin, though. This came in at 48% in the first quarter compared with 43% a year earlier. However, bad debt provisions associated with a push to win more credit card customers prevented this being fed through to the operating margin. The company says 28% of loans are classified as non-performing.

Forecasts are for earnings to rocket 273% over the next two years. Even after such growth, at today’s price, the stock would be valued at 41 times those profit predictions for 24 months from now. So, while the shares have more than halved in value since the start of the year, a very impressive future is still priced in.

A number of top managers have used this year’s price falls to add to their holdings, including Matthew Dreith, Ajay Krishnan and Scott Thomas who count MercadoLibre as one of the top ten holdings in their co-managed Wasatch Emerging Markets Select fund.

The other retailer on the top 10 list is Walmart de Mexico. This Central American discount shopping giant has been majority owned by its eponymous peer from across the Rio Grande since 1997. Walmart Inc’s stake stands at 71%, with the rest of the shares listed on the Mexican stock exchange, where they are the most traded stock. The company accounts for more than a tenth of the entire market.

The company operates 3,650 stores in 696 cities across Central America, with around two-thirds of its shops in Mexico. As well as Walmart, the group sells through several other popular, value-conscious retail brands.

The company also has a fast-growing e-commerce arm, sells phone and internet services, and has a digital finance offering. The track record is impressive with sales growing at a compound rate of 6.8% a year between 2011 and 2021. At a time of spiralling prices, the group’s value credentials could help ensure customer loyalty but like other retailers it could face pressure on margins.

Tech, planes, mines and implants

San Paulo enterprise software company Totvs is a major player in its home market and sees significant potential to become a much bigger one. As well as the growth potential offered by the prospect of Brazilian companies playing IT catchup to international rivals, Totvs has ambitions to grab a chunk of two large new markets.

It believes it can become the leading financial platform for small- and medium-sized businesses, providing them with access to high-tech payment and credit solutions. It is also looking to grow its digital commerce business, which focuses on improving clients’ sales and competitiveness.

Acquisitions are a key part of the strategy. Totvs sees itself as the main consolidator of the Brazilian tech sector. And as it grows, management is keen to increase the level of recuring revenues, especially by boosting software-as-a-service sales.

Forecasts are punchy with 40% earnings growth being predicted over the next 12 months and 30% for the year after. With a decent historical operating margin of 16%, that growth may prove attractively priced with the shares currently trading at 22 times forecast earnings over the next 12 months.

The company has attracted the attention of emerging market small cap specialist Casey Preyss, who holds a top 10 position in the shares in his William Blair Emerging Markets Small Cap Growth fund.

Top 10 elite manager favourite Grupo Aeroportuario del Sureste owns and operates nine airports in the south east of Mexico, including some of the country’s busiest. It also has an airport in Puerto Rico and six more in Colombia. Historically, the company has benefited from the strong growth in air travel both inside, and to and from the region.

It generates just over two-thirds of airport revenues from regulated services, such as passenger and airline fees, with the rest from the likes of duty free and car parking. A more variable source of revenues is construction activities, which accounted for about a fifth of the top line last year.

Like other airport operators, Covid represented a massive hit for the company. Passenger numbers at its Mexican airports plummeted to 16.5 million in 2020 compared with 34.2 million the year before. But there has been a sharp recovery as lockdown eased, with numbers reaching nine million in the first three months of the 2022 financial year.

Booming commodity prices have sent the shares of Sociedad Quimica Y Minera De Chile on a tear, including a 91% gain since the start of 2022. A key product sold by the group is lithium, which is a material used in batteries. The scramble by both old and new car makers to go electric has encouraged an insane price surge.

In the group’s first quarter it reported a near 11-fold increase in lithium revenues on the back of a 59% hike in volumes and a 572% price explosion. The metal accounted for 61% of gross profits. Prices of its other products, many of which are key agricultural inputs such as potassium, are also going through the roof.

Amid these crazy trading conditions, the company is sticking by big sustainability commitments on water usage, carbon emissions and certification. This is likely to be an important selling point to customers in both the car industry and agriculture, which are under pressure to burnish their green credentials.

The commitments have also helped attract the interest of sustainability focused elite managers. This includes Jan Boudewijns, who holds the stock in his Candriam Sustainable Equities Emerging Markets fund.

Headquartered in Alajuela, Costa Rica, Establishment Labs is a leader in breast implants for cosmetic and reconstructive surgery. It says its products are safer due to higher biocompatibility and can be monitored through inbuilt microtransponders. The implants are also designed for better aesthetics and to cause less scarring.

With its products used in two million implants, the group is amassing a growing volume of data to back up its claims. The company is also focused on driving innovation in its field, where it believes progress has stalled since the 1990s. Over the last five years, research and development spending has averaged 17% of sales.

The real potential game changer for investors is the hope Establishment’s products could get approval in China and the US. The US, in particular, could be a source of immense riches given it accounts for about half the $1.5bn-a-year global implant market.

Finance frenzy

As with last week’s Fix the Future foray into Asia, banks and insurers are a popular choice for elite managers in Latin America. Traditionally, these businesses are regarded as great ways to play economic development and emerging prosperity. Here’s a quick run through the four names on the list.

Founded at the turn of the 19th century, Grupo Financiero Banorte is Mexico’s second largest finance group. About 70% of the business involves banking, while insurance and mutual funds are other big revenue generators.

Itau Unibanco is Brazil’s largest private lender and offers a range of banking services to individuals and businesses. Peru’s Credicorp offers banking, insurance, and investment services. This includes microfinance, which has the potential to tick a lot of sustainability boxes for investors. Finally, Qualitas Controladora is a major Mexican car insurance company.

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