Bill Gross Says: Invest in Australia, Mexico, Brazil, and Canada

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It seems that wealthy, "developed market" countries have found themselves in a spot of financial trouble. In times like these, hedge funds prefer to move their business onto the next nations in line.

Bill Gross, managing director of Pacific Investment Management Co. (PIMCO) recently reported his reasons for retreat from the standby investment markets: Europe, Asia, and the United States.

To start with, U.S. Treasuries have scared investors off, despite a recent rally of returns up to 2.6%, the highest since December of 2008. "10-year Treasuries at 2.25% are discounting a heap of trouble (none of it, strangely enough, due to its own credit standing), and neither investor nor borrower may emerge from this brouhaha unscathed."

Europe is equally unappealing to Gross. Debt-ridden Greece, Portugal, and Ireland do not bode well for the European Union. "Liquidity concerns may affect all European peripheral bond markets unless the European Central Bank counters the rush for the exits with an enlarged daily checkbook."

As for China, it's not the deal it once was ... likening the U.S.-Chinese relationship to a love affair, Gross writes: "We loved them because they made cheap goods, but somehow they seemed to love us more as they slowly but surely put their people to work while ours were hitting the unemployment lines." Tension is brewing: "China questions our credit quality and the yields on their trillion dollars of Treasury bonds. The U.S. questions their exchange rate and claims currency manipulation behind closed doors."

As the trust weakens between the U.S.-Europe-China powerhouses, the spotlight now shines on Australia, Mexico, Brazil and Canada. And let us not forget about "non-dollar currencies that have strong ties to the Asian continent."

Gross writes, "we prefer the 'cleaner' dirty shirt countries of Canada, Australia, Mexico, and Brazil, where higher yields and more pristine balance sheets prevail."

However, it should be noted that although Canada, Australia, Mexico and Brazil present opportunity, they also come with risks and a vulnerability to faltering growth.

Interested in trading on Gross' idea? Below we list the most undervalued companies from those countries using the Levered Free Cash Flow to Enterprise Value ratios (LFCF/EV). Do you think these names are undervalued? (Click here to access free, interactive tools to analyze these ideas.)

1. Grupo Simec (NYS: SIM) : Steel & Iron Industry. Market cap of $1.12B. The company is based in Mexico. Levered free cash flow/enterprise value at 24.79% (levered free cash flow at $211.38M and enterprise value at $852.78M). The stock has lost 6.79% over the last year.

2. Tele Norte Leste Participacoes (NYS: TNE) : Telecom Services Industry. Market cap of $6.17B. The company is based in Brazil. Levered free cash flow/enterprise value at 22.10% (levered free cash flow at $3.41B and enterprise value at $15.43B). Offers a good dividend, and appears to have good liquidity to back it up -- dividend yield at 3.88%, current ratio at 1.27, and quick ratio at 1.26. The stock has lost 1.67% over the last year.

3. Domtar (NYS: UFS) : Paper & Paper Products Industry. Market cap of $3.40B. The company is based in Canada. Levered free cash flow/enterprise value at 21.11% (levered free cash flow at $692.25M and enterprise value at $3.28B). This is a risky stock that is significantly more volatile than the overall market (beta = 2.72). The stock has had a couple of great days, gaining 10.57% over the last week.

4. Denison Mines (NYS: DNN) : ndustrial Metals & Minerals Industry. Market cap of $630.84M. The company is based in Canada. Levered free cash flow/enterprise value at 17.15% (levered free cash flow at $86.59M and enterprise value at $504.92M). This is a risky stock that is significantly more volatile than the overall market (beta = 2.81). The stock has had a couple of great days, gaining 14.69% over the last week. The stock has performed poorly over the last month, losing 20.39%.

5. Brasil Telecom (NYS: BTM) : Diversified Communication Services Industry. Market cap of $4.55B. The company is based in Brazil. Levered free cash flow/enterprise value at 13.11% (levered free cash flow at $1.75B and enterprise value at $13.35B). The stock has had a couple of great days, gaining 5.7% over the last week.

6. MI Developments (NYS: MIM) : Property Management Industry. Market cap of $1.28B. The company is based in Canada. Levered free cash flow/enterprise value at 10.69% (levered free cash flow at $160.38M and enterprise value at $1.50B). The stock has gained 150.46% over the last year.

7. Nexen (NYS: NXY) : Independent Oil & Gas Industry. Market cap of $11.19B. The company is based in Canada. Levered free cash flow/enterprise value at 10.41% (levered free cash flow at $1.46B and enterprise value at $14.02B). The stock has gained 15.65% over the last year.

8. Research In Motion (NAS: RIMM) : Diversified Communication Services Industry. Market cap of $17.06B. The company is based in Canada. Levered free cash flow/enterprise value at 10.28% (levered free cash flow at $1.40B and enterprise value at $13.62B). The stock has had a couple of great days, gaining 18.36% over the last week.

9. Telefonos de Mexico (NYS: TMX) : Long Distance Carriers Industry. Market cap of $15.25B. The company is based in Mexico. Levered free cash flow/enterprise value at 10.21% (levered free cash flow at $2.10B and enterprise value at $20.57B). The stock has gained 27.51% over the last year.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipman does not own any of the shares mentioned above.

At the time this article was published The Motley Fool owns shares of Research In Motion. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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