With its industrial economy slowing, the peso taking a dip, and incomes dropping due to falling oil prices, it doesn’t seem like the right time to consider investing in Mexico.
But it would be foolish to overlook Latin America’s second-largest economy simply because it faces challenges.
Despite the weakening of its industrial economy in 2015, Mexico still managed to grow its GDP by 2.5%. This was the strongest year in the last three, with GDP growing only 2.3% in 2014 and 1.3% in 2013.
As in the United States, the service sector of the economy is on a roll. Services increased by 3.3% in 2015.
The fall of the peso, although a dream for tourists traveling to Mexico, is a problem for anyone importing goods from the United States. Recently, the Mexican Central Bank made a surprise rate hike in an attempt to defend the peso. So far it has worked because the decline has stopped.
The biggest challenge is the fall in oil prices. It’s easy to forget that Mexico is a big energy producer thanks to its state oil company Pemex.
Pemex, like many large oil companies, is reducing costs and investments. It cut its budget by $ 5.5 billion. Less revenue for Pemex means less revenue for the government as well. The government recently announced budget cuts in equipment to 0.7% of GDP.
The good news is that Mexico’s inflation rate is well below the central bank’s 3% target and domestic consumer demand remains strong.
Additionally, analysts expect the Mexican economy to grow an additional 2.3% in 2016. With Brazil and Canada in recession, this is a bullish forecast.
Get Mexican stocks when they’re cheap
It is always darker before dawn.
Mexican stocks have sold off massively over the past year, which means you can now get them at a discount. The Mexican ETF is trading near 6-year lows.
Most of the Mexican stocks that trade on the US stock exchanges were also beaten.
For those looking for exposure in Mexico, but don’t want to buy a Mexican business, there are ways to gain a foothold in Mexico by purchasing American products.
Sales present opportunities. The history of Mexican growth is still intact. Here is your chance to enter at a lower price. Even with the recent rally from lows, many of these stocks still have cheap fundamentals.
Three ways to invest in Mexico
1. Buy from Mexican companies that trade on the US stock exchanges
2. Buy from American companies doing business in Mexico
3. Buy the Mexican ETF
1. Buy Mexican
You can go to the source and invest in some of the largest Mexican publicly traded companies by buying stocks in Mexican companies that trade on the US stock exchanges.
Unfortunately, two of the biggest companies, america (AMX), Mexico’s largest telecommunications company, and Fomento Económico Mexicano, alias FEMSA (FMX), which is the parent company of Coca-Cola Femsa, a Coke bottler, and owns OXXO, the largest convenience store chain in Mexico, are both ranked Zacks # 5 (strong sales).
I would stay away from them until the income situation improves. Estimates were downgraded after their last earnings reports.
One interesting way to play on improving the Mexican economy, however, is tourism.
For the first 11 months of 2015, international tourism grew 14.2% year-on-year. While a large portion of travelers were Americans and Canadians, Colombians also increased their visits by 25.5% year over year.
In 2016, Mexico City expects 29.6 million tourists, up 1.7% from 2015.
How do most of these tourists arrive and travel within Mexico? Flying.
In 2015, 85% of international travelers arrived by plane.
You can invest in the growth of tourism and travel by owning one of the airport companies. There are 3 listed airport companies. They each have different segments and airports across the country.
My favorite is Grupo Aeroportuario del Sureste (ASR), also known as ASUR.
ASUR owns Cancun Airport and 8 other airports in southeastern Mexico, including the tourist hot spots of Cozumel and Huatulco, as well as Merida, Villahermosa, Oaxaca, Veracruz, Tapachula and Minatitlan.
It is also a 50% partner of Aerostar Airport Holdings, LLC, which operates Luis Munoz Marin International Airport in San Juan, Puerto Rico.
Cancun continues to be the engine of the company’s growth. Resorts continue to open in the Riviera Maya, resulting in continued volume.
Total passenger traffic for 2015 increased 12.9%, with an increase of 13.5% for domestic and a jump of 12.4% for international. The domestic increase was seen at all of its airports, as the Mexican economy continued to grow. The international gains were mainly at the Cancun airport.
ASUR is not cheap stock. It is trading with a futures P / E of 22.8x. Shareholders are rewarded with a dividend, which currently earns 2.3%.
While growth has been strong in recent years, analysts expect profits to rise only 0.7% in 2016 with a double-digit rebound in 2017.
ASUR is a Zacks Rank # 3 (Hold).
2. Buy American
Another way to play on Mexican growth is to buy American companies that are developing their activities in Mexico. There are a lot of consumers to tap into.
One of them is Home Depot inc. (HD).
Home Depot didn’t enter the Mexican market until 2001, but it quickly expanded to over 60 stores and 7,000 employees. Recently, Home Depot announced that it will be opening 5 new stores in Mexico in 2016.
Annual growth in Mexico has averaged 10% per year.
Home Depot is trading with a futures P / E of 20.3 which is not cheap but sales have been strong. Profits are expected to increase 14% in 2016 and 13% next year.
Home Depot is a Zacks Rank # 3 (Hold).
Southwest Airlines (LCV) was an exclusively domestic airline until it bought AirTran in 2011 and integrated its international network, which included Mexico and the Caribbean. In 2014, Southwest was flying to Cancun, Los Cabos and Mexico.
In 2015, he added Puerto Vallarta.
Southwest is cheap, with a forward P / E of 9.6. Profits are expected to increase 23% in 2016 as fuel remains low and travel demand continues to be high.
Southwest is a Zacks Rank # 1 (strong buy).
3. Buy the Mexican ETF
If you want to avoid all the hassle of finding individual stocks, a good alternative is the iShares MSCI Mexico (EWW).
It trades with a significant daily volume of 2.7 million shares and has a dividend of 2.4%.
You will get America Movil, which is its largest stake at 12.6%, and Femsa, which is the ETF’s second largest at 9.6%.
But you’ll also get a mix of other big Mexican companies like Cemex, the concrete maker, Wal-Mart of Mexico, and Bimbo, which is one of the largest bakery companies in North America.
I love their pound cake and snack-sized croissants, some of which are also available at convenience stores in the United States.
The Mexican ETF is at its lowest, up 11% last month, but it still hasn’t hit its 52-week high.
Look for opportunities in Mexico
The Mexican middle class continues to grow, which will create many opportunities for both Mexican and American businesses.
Home Depot isn’t the only US retailer opening new stores in Mexico. Gap inc. (GPS) opened seven Old Navy stores in Mexico City in October 2015.
Also in October 2015, Williams-Sonoma Inc. (WSM) opened 13 stores across Mexico City, bringing together all of its top brands, including Pottery Barn, Pottery Barn Kids, PBTeen, Williams Sonoma and West Elm.
Chain restaurants are also taking hold, so look for companies that are expanding in Mexico, including Starbucks and Buffalo Wild Wings.
The story of Mexican growth has only just begun. When times are tough, this is when a wise investor should look to get started.
[The author of this article owns shares of FMX.]
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Tracey Ryniec is the Value Equities Strategist for Zacks.com. She is also editor-in-chief of Insider Trader and Value Investor services. You can follow her on Twitter at @TraceyRyniec and she also hosts the Zacks Market Edge podcast on iTunes.
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