Investing in Cuba: Fidel's Out. Raul's In. Here's Your Investing Guide to Cuba

by Louis Basenese

Investing in Cuba: Fidel's Out. Raul's In. Here's Your Investing Guide to Cuba

by Louis Basenese, Advisory Panelist, Investment U

Wednesday, February 27, 2008: Issue #768

He weathered 10 American presidents, reigning (as dictators do) for 49 years. And he's finally out. Voluntarily.

Within a week of Fidel Castro's resignation, the torch officially got passed to his brother Raul, or "Castro-Lite," as I like to call him. And I'm sorry to say, under Raul, change might be another long time coming...

Yes, Raul did say Cuba's economy needed "structural and conceptual changes." But keep in mind, he's a lifer. He's been onboard with Fidel's revolution since it started back in 1953 with a failed assault on the Moncada Barracks. It's even speculated he was the first of the Castro brothers to win the loyalty of Che Guevara. And we all know the company we keep speaks volumes about us.

Ultimately, Raul's thinking does not vary widely from Fidel's. And remember, Fidel's out of power, not dead. Even in the shadows, we can expect him to wield considerable veto power should Raul try to change Cuba too much, or too fast.

That's not to say Cuba's a sucker's bet, however. To be sure, there are several potential profit opportunities for those investing in Cuba...

Timing Is Everything When Investing in Cuba

Despite what other investors might be indicating, profiting from a free(r) Cuba will not be a matter of investing first. Instead, he who invests at the right time will profit most.

And right now is anything but. And the herd is clueless...

Once news hit about Fidel's resignation, investors plowed into the Herzfeld Caribbean Basin Fund (Nasdaq: CUBA), formerly The First Cuba Fund, pushing prices up as much as 29% in a single day.

As the fund manager explains, it's a simple way to own American and international companies that stand to benefit from better relations with Cuba. Sounds too good to be true. And it is.

Here are three reasons to avoid this one-stop Cuba investment...

  • It's a relatively small fund, with only $16 million in assets under management (AUM). As a general rule, I prefer funds with $100 million or more in AUM.
  • The expense ratio is unacceptable at 3.28%, almost double the average for similar specialty funds, based on data from Morningstar.
  • The fund's trading at a 13% premium.

The last point is the most important one. At current prices, you're paying more than the underlying assets are worth.

The Smarter Way Towards Investing in Cuba

Obviously, a smarter way to begin investing in Cuba would be to identify the fund's most promising holdings and buy them separately. To that end, I've screened the fund's latest holdings, and the rest of the market, too, for Cuba-related stocks that will play into likely growth trends.

Here they are, arranged thematically...

  • Tourism: After decades of being banned, expect throngs of tourists and businessmen to flock to the country (legally). And they'll come by plane or ship, making Copa Holdings (NYSE: CPA) and Royal Caribbean (NYSE: RCL) attractive buys.
  • Shipping: The first wave of trade with Cuba will certainly be humanitarian supplies and materials to rebuild the country. But Cuba's ports are too shallow for most modern container ships, so in the early goings, Trailer Bridge (Nasdaq: TRBR) should benefit most. It operates the largest fleet of shallow draft vessels.
  • Reconstruction: I believe the need for massive infrastructure overhauls will ultimately be the straw that breaks Cuba's government. And herein lies the biggest opportunities - companies involved in the rebuilding. To help update Cuba's ailing water infrastructure, I like Consolidated Water Co. (Nasdaq: CWCO). In terms of overhauling telecommunications systems, consider Atlantic Tele-Network (Nasdaq: ATNI).
  • The I.O.U. Angle: Cuba seized a hunk of foreign property, according to the U.S. Foreign Claims Settlement Commission. Before the embargo is lifted, expect them to be forced to square up. That could result in a windfall for Starwood Hotels (NYSE: HOT). It's owed about $50.7 million. And OfficeMax (NYSE: OMX), too. It's the largest property claimant in Cuba. It used to own the Cuban Electric Co. before it was seized following the 1959 revolution.

You'll notice the majority of the companies above are small caps. And that's no mistake. With only 11.4 million citizens, Cuba is not a huge market. Accordingly, an up-tick in Cuban business will hardly move the needle for large-cap companies with multi-billion-dollar revenue streams. Since we're after the most profit potential, it's vital to stick with companies likely to enjoy the most meaningful increase in overall earnings.

A Note About Market Timing & Recommendations

Please note, I think it's too early to act on these recommendations.

No real change will come until the U.S. lifts its longstanding embargo. And according to the Helms-Burton Act of 1996, that will only happen if Cuba releases political prisoners, holds free elections and compensates U.S. citizens who had property seized.

Other developments I'd watch for before investing in Cuba include: codifying property-rights laws, reopening free-trade zones closed in 2000, and making efforts to service $13 billion in foreign debt.

Now might not be the ideal time to start invest investing in Cuba. But the prognosis, no doubt, is improving. And that warrants our attention. So stay tuned.

Good investing,

Lou Basenese

Today's Investment U Crib Sheet

  • If you're an impatient investor, looking to stake a claim in Cuba's eventual free(r) market, consider Imperial Tobacco Group (NYSE: ITY).Thanks to its recent acquisition of Spain's Altadis, it now owns a 50% stake in the Cuban state tobacco company. Since the U.S. accounts for half the world's cigar sales, but can't enjoy a fine hand-rolled Cuban, it stands to reason ITY will enjoy a nice up-tick in sales should the trade embargo be lifted.

    More importantly, ITY's fundamentals are improving and it sports a 4.3% dividend yield. So at least you'll get paid to wait for the Cuba-kicker, however long that may be.

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