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Can These Three Emerging Market Stocks Beat the IMF's Predictions?


Given the disappointment of weakening economic expansion of emerging market economies, we decided to focus on emerging market stocks that have a bright, long-term future.

Last week, the International Money Fund (IMF) released its latest update of the World Economic Outlook (WEO) (PDF), in which the fund reduced its 2013 global growth forecast. This was largely attributed to a slowdown in key emerging market economies, the recession in the eurozone, and a weaker US economy. The fund now expects the global economy to grow by 3.1% this year, unchanged from 2012's global growth rate and down from the 3.3% projected back in April (PDF).

Per the update, financial volatility in emerging markets poses a significant challenge to the growth of the global economy. "Recent increases in advanced economy interest rates and asset price volatility combined with weakness in emerging market domestic activity led to some capital outflows, equity price declines, rising local yields, and currency depreciation in the latter," wrote the IMF. The fund also noted "the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the US leads to sustained capital flow reversals."

These looming risks led the IMF to scale back its previously released growth rate for emerging markets and developing economies by 0.3% to 5.0%. The fund cut its forecast for Brazil's 2013 growth to 2.5% from 3%, lowered Russia's to 2.5% from 3.4%, revised India's to 5.6% from 5.8%, and reduced China's to 7.8% from 8.1%.

Investing Ideas

My firm set out to identify emerging market stocks that are well-positioned to grow despite the slowdown in economic growth. To begin, we constructed a universe comprised of stocks from emerging markets as listed in the MSCI Emerging Markets Index (INDEXNYSEGIS:EMX), excluding the major economies (Brazil, Russia, India, and China) in order to generate a more interesting and diverse list. Given the disappointment of weakening economic expansion of emerging market economies, we decided to focus on emerging market stocks that have a bright future, namely those with long-term growth potential. We screened for stocks that are expected to achieve high earnings growth in the future, specifically looking for those with 5-year EPS growth above 15%.

Next, we turned our focus to liquidity. Sources of liquidity play a crucial role in sustaining company operations in the short term as well as in financing investment for longer-term growth. Since the IMF highlighted the threat of slowing credit and worsening financial conditions amongst emerging market economies, we decided to look for companies with high liquidity as indicated by a current ratio above 3.

The current ratio is a liquidity measurement that shows a company's ability to cover its short-term obligations. It's calculated as current assets (cash and accounts receivable) over current liabilities (accounts payable and short-term debt). Typically, when a current ratio is below 1, it suggests that the company lacks sufficient liquid assets to cover its short-term liabilities if profits declined. A ratio above 3 indicates that the company has at least three times the liquid assets to cover its obligations if its profits fell.

We were left with three stocks on our list.

The List

Average analyst ratings are sourced from Zacks Investment Research.

1. Homex Development Corp. (NYSE:HXM): Operates as a vertically integrated home development company principally engaged in the development, construction, and sale of affordable entry-level, middle-income, and tourism housing in Mexico; and affordable entry-level housing in Brazil.
  • Market cap at $195.24 million; most recent closing price at $3.50.
  • EPS growth over the next five years at 40.90%.
  • Current ratio at 9.20.

2. Navios Maritime Holdings Inc. (NYSE:NM): Operates as a seaborne shipping and logistics company in Greece.
  • Market cap at $556.62 million; most recent closing price at $5.47.
  • EPS growth over the next five years at 16.00%.
  • Current ratio at 3.00.

3. Cementos Pacasmayo ADR (NYSE:CPAC): Produces, distributes, and sells cement and cement-related materials in Peru. It operates in three segments: Cement, Concrete and Blocks; Quicklime; and Third-Party Construction Supplies.
  • Market cap at $6.98 billion; most recent closing price at $12.00.
  • EPS growth over the next five years at 18.10%.
  • Current ratio at 3.30.

Editor's note: This story by Mary-Lynn Cesar of Kapitall, was produced exclusively for Minyanville. All data sourced from Finviz.

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