1/22/2013 4:45 PM ET|
Time to invest in Cuba?
3. Venezuelan President Hugo Chávez may be on his deathbed
The big wild card in all this is Venezuelan President Hugo Chávez, who may be rapidly losing his fight against cancer. Here's why his demise could lead to an end to the embargo.
Chávez has an unusually close personal and ideological relationship with Fidel Castro that goes back many years. This explains why Venezuela subsidizes the Cuban economy to the tune of about $8 billion worth of oil a year. It's not clear that whoever succeeds Chávez would continue the oil subsidy. Without it, says Roett, the Cuban economy would tank and a social crisis would ensue.
That might either force out the Castro brothers or pressure them to pass the torch and make the political and economic reforms needed for the U.S. to lift its embargo and possibly lend the economic aid that would avert chaos.
"Change will only come when the octogenarians who are running Cuba today have no choice but to open up in a meaningful way," says Roger Noriega, a former assistant secretary of state for Western Hemisphere affairs who now directs Latin American studies at the American Enterprise Institute. "They've only adopted reform when they were under pressure." An end to the Venezuelan oil subsidy and ensuing economic problems might create that kind of pressure.
Helms-Burton calls for the U.S. to support any transitional reform government. Thus, Cuban domestic reform might attract U.S. aid that could be needed to avoid economic and social chaos if Venezuela pulls away after Chávez.
If the embargo goes away and Cuba transitions toward a market economy, these companies could benefit, maintains Herzfeld.
Cruise line companies Carnival and Royal Caribbean Cruises (RCL) would benefit from an end to the embargo, since they'd have a whole new market. Cruises to Cuba would be a popular way for turistas to see the country, out of necessity, since hotels are in a poor state in Cuba. "If the embargo were lifted, their Caribbean business would double," says Herzfeld.
Michael Scanlon, an analyst with the John Hancock Balanced (SVBAX) fund, likes Carnival in part because it looks cheap. A key valuation metric here is enterprise value (market cap plus net debt) per "available berth per day," or the number of available beds per day. It is currently at $535, compared with almost $1,000 in 2006. Scanlon believes ticket pricing should improve because cruise companies are limiting capacity expansion over the next few years. And a lot more boomers, a key cruise demographic, are moving into retirement.
Copa, a Panama-based regional airline serving Cuba, would benefit from an upturn in travel from the United States. The carrier already stands to gain from Cuba's recent loosening of travel restrictions on its citizens, says Herzfeld. "This is a very major change in policy," he says. This reform will help Copa even if the embargo is not lifted, because Cubans will be traveling more throughout the region.
Coca-Cola Femsa would see a lift in business in Cuba, as the distributor of Coca-Cola in Central and Latin America, though you can already buy Coca-Cola in Cuba.
Seaboard is the largest container carrier in the Caribbean, so it would benefit from greater U.S. trade with Cuba and a revitalization of Cuba's economy, says Herzfeld. He also expects gains for the Norfolk Southern (NSC), railroad. "We believe a lot of freight for Cuba that comes down the East Coast to Florida will be shipped on their railroads."
"If the embargo with Cuba is lifted, there will be boom in Cuban infrastructure development," says Herzfeld. This could help MasTec (MTZ), a Florida infrastructure construction and engineering company. It would also help Vulcan Materials (VMC) and Martin Marietta Materials (MLM), which sell granite, limestone, sand, gravel and cement used in construction, and Watsco, which sells air conditioners. Florida-based homebuilder Lennar (LEN), would also pick up business in Cuba, he predicts.
Herzfeld Caribbean Basin Fund
You could also buy shares of the Herzfeld Caribbean Basin Fund, which Herzfeld has positioned to benefit from an end to the embargo. This is a closed-end fund, a kind of investment company that raises investment capital and then issues a fixed number of shares. The shares then trade throughout the day like stocks, moving up or down as the value of the fund's holdings change.
Herzfeld's fund looks cheap, because it currently trades at about a 7% discount to its net asset value, or the value of the stocks it owns. The NAV is currently around $9 per share, says Herzfeld. But the fund shares sell for around $8.38. The fund has historically been sensitive to Cuba-related news, and at some point almost every year, it rises above its net asset value.
"The holdings will continue to do well, even if nothing changes in U.S.-Cuban relations," predicts Herzfeld. "If the embargo is lifted, they will get a significant amount of new business." Herzfeld and his family are the fund's biggest shareholders. This fund's stock is up by an annualized 16% a year over the past 10 years.
Of course, betting on an end of the embargo assumes that Cubans still have enough entrepreneurial spirit -- after 50-plus years of living in a government-run economy -- to create and run businesses vigorously enough to make an economy hum.
"It is going to be extremely hard for Cubans to leave that mentality of depending on the government and take chances," says Hidalgo. But he thinks it would happen. After all, he says, Cuba was one of the most developed Latin American countries when Castro took over, and the culture behind that achievement is not totally gone. "You still see a lot of underground economic activity, which means that the capitalist spirit is there," says Hidalgo. "The communist regime has not erased that capitalist spirit."
At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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Cuba was supported by the US, it was only when the US demanded to dictate policy on the price of sugar, oil etc after the overthrow of the criminal Batista, that Cuba sought a better way to help the vast majority of its people! One of the smallest countries in the world has for over 60 years stood up against the failed embargo. Cuba is supported by every country in the world and especially for their humanitarian aid for such a small country. The facts are that we should never ever have to pay the corporate america greed, back, for what they stole from Cuba in the first place. That same american greed of the banks almost destroyed our country, only difference was we rewarded them instead of nantionalizing. So, it is important that we work to have meaningful normal relations with Cuba that both countries respect and get off the rehtoric. America is a great country but so are all the rest of the worlds countries. It is about RESPECT.
cuba would be a boon to the tourism industry of florida and the gulf coast.
then we pick up a new flush of food-cigars-culture that has only been "allowed" in florida.
thank god cuban jazz music made it's way to new york city in the 40's! at least we always have had that to enjoy!
A VET OF THE REALISTIC: Obama is doing a great job.I`m much better of than I was 4 years ago..
My busines was started on a shoestring and it`s expandind on a good busines plan.Ive
expanded it with stock market gains.It`s all about using your head and not listening to the
negitive far right lying about Obama`s record.
O.K. Let's get a market going so people can put their money where their mouth is.
I'm bidding $10,000 for Cuba. Where's the offer?
I'm sorry most of these comments that are negative to such an idea are obviously written by fools!
It is yes a communist country. The people are not commies, just the government.
If you look at the direction of our current government, wealth redistribution, socialized medicine, what direction are we headed?
We need to concern ourselves with changing our government first and looking to expand our financial futures.
No one said to take on Cuba as another commonwealth like PR but to open their and our markets to profitable things like tourism for them which the would give them profits to buy from us.
I`ll stick with investing in America.After 4 years the market is up 85%, better thanthe
first 4 years of Clinton, G.H. Bush, Reagan andGW Bu**** about time people realized what
a great President we have.This is the President who went after and got Bin Laden and
several terrorist operatives after Bush said "I don`t know or care where Bin Laden is"It`s
great to have a strong President.Obama makes me proud to be an American.God bless
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