If you’ve followed along with me over the last few months you know I’m a big believer in U.S. technology.
But I’ll go anywhere in search of profits for you.
So if there’s a foreign firm that offers us a chance to diversify our holdings — and make a killing in the process – you can bet that I’ll tell you about it.
In fact, that’s just what I’ve found – a non-U.S. firm that’s actually one of the world’s most-successful e-commerce plays.
The company’s name is Spanish for “free market.”
But the folks who truly understand the company’s potential have dubbed it the “eBay of Latin America.”
Big Profits From South of the Border
The company I’m telling you about is the Buenos Aires-based Mercadolibre Inc. (NasdaqGS: MELI), which pioneered the concept of online auctions for Latin America back in 1999.
Mercardolibre began operations in its native Argentina, but quickly expanded. Today it operates in 13 countries that occupy one of the world’s fastest-growing regions.
The United Nations’ Economic Commission for Latin America estimates economic growth in the region at 3.8% this year. That’s more than twice the U.S. GDP growth in this year’s first half.
As the economy south of the border expands, millions of consumers will take advantage of rising incomes to purchase tech products and consumer electronics.
Mercadolibre is already capitalizing.
Indeed, the retailer has adopted marketing programs that induce consumers to register on its Website and bid on everything from digital camcorders to tablet computers.
And Mercadolibre is uniquely poised to cash in.
Like its counterpart in North America, the market in Latin America is experiencing a massive surge in online spending.
In Brazil alone, Web-based sales are projected to hit $25 billion by 2017, more than double the $12.2 billion estimated for 2012, according to respected researcher Forrester Inc.
And the 2012 “Latin America Digital Future in Focus” report by comScore Inc. says the region’s online population grew faster than any other area of the globe in 2011, rising 16% to reach 129.3 million visitors.
Talk about dominant: With 81.5 registered users, Mercadolibre’s customer base accounts for nearly two-thirds of all online users throughout Latin America.
No wonder Mercadolibre’s stock has done so well. It’s up 44% over the past year, more than double the 21% gain that the Standard & Poor 500 experienced during the period.
But there’s more to come.
Lot’s more, in fact.
Making the Grade
At the current market cap of 5.5 billion, Mercadolibre’s stock is trading at $124 a share.
Be warned: Don’t let that stock price put you off.
Remember: A 50% gain on a given block of investment capital isn’t any different if it’s invested in a $30 stock or a $200 stock. (Some readers were stunned recently when I ran the numbers and proved this to them.)
And when it comes to stocks, prices are relative. Back in 2009, in fact – when Apple Corp. (NasdaqGS: AAPL) was selling for around $100 a share – I told my investing friends it was actually “cheap.”
Two years later when Apple was at $300 a friend wanted to sell. I told her not to. The reason: Apple still seemed “cheap” to me. It eventually topped out at more than $700 a share.
With Mercadolibre, the question we have to answer is a simple one: What’s the profit potential?
To answer that, let’s run through the five filters I use to make tech-investing decisions, and see how Mercardolibre fares.
- Rule No.1 – Great Companies Have Great Operations: As always, we’re looking for the best-run firms we can find. And it all starts with leadership. Though he operates chiefly in Latin America, Mercadolibre CEO Marcos Gilperin has the makings of a Silicon Valley legend. After all, he founded the firm back in 1999 while attending Stanford University, where he earned his MBA. One of his finance professors helped Gilperin meet venture capitalists. The VCs didn’t like just the business plan; but they were impressed with the young executive’s leadership skills. So they quickly funded the company. Just two years later, industry heavyweight eBay Inc. (NasdaqGS: EBAY) invested in the firm – and now has a 19.5% interest. Former CEO, Meg Whitman said of the deal: “Mercadolibre’s management is doing a superb job in building the leading online trading company in the region and it’s a great match for eBay.”
- Rule No. 2 – Separate the Signal from the Noise: We don’t want to fall prey to the Wall Street Hype Machine. Fortunately, we know what to look for and understand how to decode even the most arcane numbers from company financial reports. And we look for companies that have rock-solid fundamentals. Mercadolibre has this covered. In this year’s second quarter, earnings per share (EPS) jumped 18% to 67 cents as sales rose 26%. The company boasts a 25% profit margin and a 37% return on equity (ROE). It has more than $200 million in cash and almost no debt.
- Rule No. 3 – Ride the Unstoppable Trends: We’re looking for stocks in red-hot sectors because they offer the best chance for life-changing gains. We’ve already seen that Latin American e-commerce is booming. Mercadolibre also is benefiting from the rising incomes in that region, where millions are buying PCs and smartphones and joining the mobile revolution. The company has mobile apps that work on a wide range of smartphones and tablet computers. Not surprisingly, mobile now accounts for roughly 10% of gross volume, company execs said in a recent conference call with analysts.
- Rule No. 4 – Focus on Growth: Tech companies that generate the highest stock returns are those that grow the quickest. Investors are willing to pay dearly to gain access to all that cash flow. That’s one of the main reasons why Mercadolibre’s stock has done so well – and will continue to do so. Over the last five years, the company has grown sales by 170% to $373.6 million. During that same period, the number of new registered users increased 140% to 81.5 million. During this year’s second quarter alone, the company enrolled 4.5 million new users, a 23% increase from the year-ago period.
- Rule No. 5 – Target Companies That Can Double Your Money: This is where we look at the firm’s earnings growth rate and its expected future earnings to see how long it will take for the stock to increase by 100%. Psychologically, investors are often put off by stocks trading at high share prices. But the point to focus on is growth potential: $5,000 invested in a $125-a-share stock that doubles nets you the same profit as $5,000 invested in a $25 stock that doubles. And we believe Mercadolibre has the potential to double. The company has increased earnings per share at an average annual rate of 35% over the last three years. I’m projecting a 22% annual rate over the next five years, meaning earnings could double in less than 3.5 years. Even if we cut the earnings growth rate to 15%, it still could double by the end of 2018. As long as the stock maintains its current valuation (Price/Earnings, or P/E) multiple, it’s reasonable to project that the stock could double in that time frame.
Every investor dreams of finding that future heavyweight before it achieves dominance. With Mercadolibre, we believe you have that chance.
Before I leave you…
I have some new important research that I plan to share with you this week.
As you know I have been involved with tech investing for 30 years. But I can honestly say I’ve never seen an opportunity as big as the one that’s coming.
It’s about a new medical device and the very important (and life-saving) implications this device will have on all of us.
I have been working round the clock to get this research to you before anyone else – and now I can’t wait to share it with you.
[Editor’s Note: I welcome your comments, questions and suggestions. Post a comment below … I look forward to hearing from you.]