It has been an interesting year for Latin America equities, but broadly speaking, one of 2011's worst-performing regions has bounced back nicely in 2012. There is a simple, but true cautionary tale and it is one that can be applied to almost any region. Just because a particular region performs does not mean all of the stocks there are should be considered "buys."
Latin America personifies that notion. Using the country-specific ETFs available to U.S. investors that track Latin American nations, a mixed bag is what is found. Down over 22 percent, the Global X FTSE Argentina 20 ETF (ARGT) has been a disaster. The iShares MSCI Brazil Index Fund (EWZ) is down "just" 5.7 percent, but that is still enough to make the worst-performing of the four major ETFs tracking the BRIC nations.
Conversely, the iShares MSCI Mexico Investable Market Index Fund (EWW) and the Global X FTSE Colombia 20 ETF (GXG) have impressed, even overshadowing a 17.1 percent gain for the iShares MSCI All Peru Capped Index Fund (EPU).
Some Latin American equities have delivered the goods in 2012 while some have not. With an ample amount of constituents in both groups, investors looking to avoid (or short) LatAm dogs next year need only look at this year's losers.
Telecom Argentina (TEO) A superficial analogy of Telecom Argentina would leave investors thinking this the AT&T (T) or Verizon (VZ) of Argentina. That is basically what Telecom Argentina is, but the sector similarity ends that comparison.
Telecom Argentina offers some high points. The company has no long-term debt, a high return on equity and a dividend yield that is well in excess of AT&T's or Verizon's. However, there is no getting around the fact that this company operates in Argentina and that means a far higher degree of risk that most investors are willing to take on with telecom stocks. Current Argentina-related risks include a government that is pro-nationalization and anti-free market, a looming sovereign debt default (one that would be the country's second this century) and the potential loss of frontier market status. Petrobras (NYSE: ) A lot can be said about Petrobras, Brazil's state-run oil company, and not much of its good. This might throw quantitative analysis geeks for a loop, but the reasons to continue avoiding Petrobras are easily spotted and do not require intense analysis. Not only has the stock been the worst performer of the major, U.S.-listed global integrated oil names over the past five years, but the company's expenses continue to rise while production cuts continue to pile up. The continuous reduction of output estimates is vexing at best given that Brazil is home to some of the most bountiful oil reserves in the world. Beyond all that, Petrobras pays an anemic dividend that is paltry in comparison to rivals ranging from Exxon Mobil (NYSE: XOM) to Royal Dutch Shell (NYSE: RDS-A) to Total (TOT). In other words, investors are not compensated to deal with the seemingly endless frustrations Petrobras has become infamous for delivering.
If those are not good enough reasons for investors to shy away from Petrobras, consider this: Noted short seller Jim Chanos recently called Petrobras one of his favorite shorts.
Fortuna Silver Mines (FSM) After noting the impressive returns generated by the iShares MSCI All Peru Capped Index in 2012, the appearance of a Peruvian stock may come as a surprise to some. However, there is more to the story. First, Fortuna Silver Mines is not a member of the Peru ETF's lineup.
Second, and perhaps more importantly, silver miners share something in common with gold miners and that something is not a positive. That being a penchant for underlying the futures price of the metal they mine. In the case of Fortuna, the stock has notched a double-digit loss in 2012 despite the fact that the iShares Silver Trust (SLV), which is backed by physical silver, has surged almost 19 percent.
Do not forget that Fortuna is a micro-cap name with a long-term debt-to-equity ratio of almost 4.1. The latter of which is a fine reason to avoid this sub-$5 name.
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