3 Beaten-Down Brazilian Buys

As the U.S. indices mounted one of their strongest Octobers ever, the S&P 500�s 11.5% return paled in comparison to the 21% surge in the iShares MSCI Brazil Index (NYSE:EWZ). Impressive to be sure, but that�s only part of the picture. If you go back through all of 2011, the S&P 500 is slightly in positive territory through the first 10 months while the EWZ was down almost 19%.

It�s been a tough year for Brazilian stocks thanks to concerns about the global economy. Brazil is rich in natural resources, so commodity exports are a big driver of growth there. Fears over slower growth around the world — and some think a recession is looming — have hit commodity- and natural resource-related stocks especially hard.

By many measures, Latin American stocks haven�t been this cheap since the U.S. financial crisis three years ago. And while red-hot growth in emerging markets might have cooled for the time being, it isn�t going away. The good news is that the dip this year minimizes further downside risk, and many of these stocks are poised for a nice move when there are signs the global economy is strengthening.

Here are three beaten-down Brazil buys that could be viewed as value plays, growth plays — or both. Heck, they could even be considered income plays, because all three have very nice dividend yields.

Vale

Vale (NYSE:VALE) is the second-largest mining company in the world and the largest producer of iron ore, which is the most produced and consumed mineral in the world. And prices have held up much better than other commodities like copper and nickel in recent weakness. This relative strength should continue going forward when you factor in supply and demand, especially in emerging markets.

In the third quarter, Vale�s profits fell 18% from 2010, but most of that was because of weakness in Brazilian currency. Revenues actually increased 16%, and the company produced a record amount of iron ore in the quarter. Iron ore sales volumes did fall slightly, but prices were 18% higher than the third quarter of 2010 and near record levels.

The stock is down 25% in 2011, and management said in its third-quarter earnings statement that a deep global recession already is priced into VALE shares. I would largely agree with that. I like VALE as a long-term play on emerging-markets growth, which we know will continue to be strong. A temporary slowdown or even recession would delay an upside move, but it wouldn�t derail it. Plus, you collect a nice 7% dividend yield.

Itau Unibanco

Itau Unibanco (NYSE:ITUB) is the largest private-sector bank in Brazil. (Banco do Brasil has the most assets, but it is controlled by the government.) As with many other financials this year, the stock has struggled, losing 20%.

For the rest of this year and into 2012, a weak global economy could keep a lid on growth as interest rates are lower than they used to be and fewer loans are being made. Longer term, however, banks in Brazil will benefit from the acceleration of growth and additional wealth created in a rising middle class.

ITUB is strengthening itself in a weak environment by cutting costs and increasing efficiency, which increases the upside potential as the economy strengthens. The stock is a value at just 8.1 times expected 2012 earnings and kicks out a 3.4% yield.

Embraer

Not surprisingly, orders for jet airplanes have not exactly been robust in the slow economy. And while a surge in orders isn�t imminent, the longer the drought continues, the more pent-up the demand for when orders do start to flow again.

Brazil�s Embraer (NYSE:ERJ) is an exciting growth story in both regional jets used by airlines as well as private business jets. The regional jet is a growing area of commercial aviation because these smaller, fast and sleek single-aisle planes are used for shorter distances and often are waiting in hubs to be the first or last leg of a journey for anyone traveling to and from places such as Daytona, Santa Fe, Cedar Rapids, White Sulphur Springs and Vail. The reason: It is more economical to run these smaller planes than fly large aircraft at low passenger capacity. This technique is being used in Asia and Latin America, too. Airports are springing up, and regional jets are a great way to service them.

In business jets, the company is ready to unveil new models (the Legacy 450 and 500), which are expected to be very successful. China also is an important market for Embraer in the executive jet area. It can�t sell regional jets there for competitive reasons, but air travel is growing fast in China, and Embraer has made that country enough of a priority that it now does final assembly of planes in China.

Through the first three quarters of 2011, Embraer delivered 122 planes. What�s interesting, however, is that the company is sticking by its target of 220 plans for the year. That will mean a busy fourth quarter of 100 deliveries if it is to meet that goal. Part of the reason for the year-end frenzy is the June earthquake in Japan slowed down production of some engines, pushing delivery back. I think 2012 should see at least that many planes delivered and possibly more if the global economy gains traction.

ERJ is down about 3.5% for the year, which is better than many of its Brazilian counterparts, and it yields a nice 5.6%. It�s still pretty cheap at 11 times next year�s earnings, and I expect the stock to move in anticipation of a stronger economy.

As of this writing, Hilary Kramer did not own a position in any of the aforementioned stocks.