An Emerging-Market Pick for U.S. Investors

Over the course of the last few years, investors have become increasingly frightened of emerging markets. And it's not their fault. China was marketed as the salvation for equity investors just a few years ago until frauds popped up left and right, leaving many investors out in the rain. The BRIC regions may have disappointed investors who looked to profit from the juicy GDP growth, but there are still great opportunities for the brave -- and it doesn't mean you have to be a risk taker. This emerging-market pick isn't too far from home, it has business in the U.S., and it could be a great addition to your value portfolio.

There, there -- it's OK
Investors scare easily these days. In earlier times, imaginations ran wild, and investors were out to find a good stock pick anywhere they could. Now, they mainly focus on what's already well-known. It's a safer way of finding good companies, but given the amount of coverage most of them receive, it's hard to find a good deal. To find value for your portfolio, you're better off looking at the unloved, under-researched companies.

I'd like to talk about an emerging-market pick that shouldn't be too scary. It's a well-known company with a strong presence in the United States. A rough couple of years and emerging-market fright have valuations down and prime for the pickin'.

Market cementiment
The company is actually one of the biggest building-materials producers in the world, Cemex (NYSE: CX) . Cemex is based in Monterey, Mexico, with production facilities in 50 nations, and it's the single-largest producer of ready-mix concrete in the world. It's different from many emerging-market picks one hears about because it's a relatively large company with a strong international presence. This isn't like investing in pig farms in China; the risk is much, much lower.

Cemex grew organically for half a century in Mexico before it began buying up cement companies from Spain, Venezuela, and even Australia. Some of these acquisitions have backfired -- most recently, the company's overpriced purchase of Australia-based Rinker. The company paid up big-time just a little before the global economic meltdown. Matters worsened when the U.S. brought antitrust charges against the company for its acquisition, forcing it to sell certain assets and devalue the deal it had already paid for.

The market has already taken some notice of Cemex's turnaround, though, as it currently trades near its 52-week high and 240% higher than it did a year ago.

Room to run
Regardless of its massive gain during the past year, Cemex still has plenty of opportunity ahead of it. The company will certainly benefit from the pending rebound in U.S. and Mexican housing. Management has made a strong effort to reduce the company's heavy debt load, most recently by announcing the sale of a Latin American unit to be spun off on the Columbian stock exchange.

When looking at a metric such as EV/EBITDA, Cemex doesn't look too cheap at 9.89. The industry average is 8.2. But for a company such as this, I am intrigued by its book value, given the large tangible-asset base. Even with its significant rise in stock price, Cemex still trades below its book value. Its return on assets isn't too impressive on a trailing basis at 2.13%, but I believe that will improve as business picks up.

The Mexican macroeconomic environment will only continue to improve as manufacturing shifts away from China. The Governor of the Bank of Mexico is also very adept at selling dollars to buoy the peso after brief drops and has done so with great efficacy.

Another housing bet
I have been pushing the U.S. housing rebound lately, but that's because it seems almost too obvious that the rebound is here. Just look at Lennar's (NYSE: LEN) recent results, and one can see that housing is making a move back up the ladder. The company quadrupled its profit last quarter over the year before and looks only to be getting stronger, as its backlog is up 80%.

Cemex may look a bit pricey on an EV/EBITDA basis, but compare it to a U.S. company such as Eagle Materials (NYSE: EXP) . Eagle Materials is a smaller company with a similar return on assets and an EV/EBITDA ratio of 27.14. Generally, I would prefer a stock in this sector to be closer to eight. Now, 9.89 isn't great, but 27.14 is madness. The company also carries around $4 million in cash, compared with $650 million for Cemex.

When compared to Eagle Materials, Cemex is looks quite cheap and offers investors a less risky option to the rebound in building materials in the U.S.

All in all, Cemex has good things ahead of it, with the support of one of the most stable emerging-market economies in the world. To compare investing in Mexico to China is downright wrong. Mexico is actually worth your money.

If you still prefer domestic companies but want something with emerging-market exposure, take a look at this special free report about three companies our analysts believe are poised to make a killing from new and growing markets.