Top Stock Picker Shuns Billionaire Carlos Slim's America Movil

  • Milltrust Latin America has beaten 99% of peers this year
  • Defensive stocks look `overvalued,' according to Scott Piper

One of the top stock pickers in emerging markets says investors should shun shares of Latin America’s biggest companies including America Movil SAB and take a risk on lesser-known stocks such as Brazilian sugar producer Cosan SA Industria e Comercio.

“Markets have been piling into defensive stocks over the last couple of years, which just look overvalued,” said Scott Piper, a money manager at Itau Unibanco Holding SA who oversees the Milltrust Latin America fund, which has outperformed 99 percent of its peers this year. “We focused on companies that potentially had leveraged balance sheets but over the next three years had a lot of visibility that they would generate enough cash flow to deleverage, which is a tremendous tailwind for earnings.”

Cosan, co-owner of the world’s largest sugarcane processor, posted record free cash flow in 2015 and is forecast to see earnings quadruple this year. While its shares have beaten the rally in the Ibovespa in 2016 even after falling Monday on reports that fuel prices may decline in Brazil, they trade at about half of their record valuation in 2013. Meanwhile, wireless carrier America Movil is above its five-year multiple, according to data compiled by Bloomberg based on estimated earnings.

The Milltrust fund doesn’t own any shares in America Movil, the phone company controlled by billionaire Carlos Slim, which accounts for 5.1 percent of the benchmark MSCI Emerging Markets Latin America Index, as Mexico’s efforts to increase competition in the industry dim the outlook for its growth. In addition to Cosan, the fund is also overweight on Brazilian power utilities amid prospects for stronger free cash flow generation, according to Piper. Brazilian banks are also a good bet as they’ve managed to set aside money for possible losses on loans while also cutting costs, he said.

The $11 million fund has returned 17 percent this year, compared with a 15 percent increase for the MSCI gauge. The fund ranked No.17 for year-to-date performance among more than 3,000 offshore, open-end stock funds focused on emerging markets, according to data compiled by Bloomberg.

Traders have pushed up the value of Latin American stocks this year amid signals that the Federal Reserve will take longer than previously estimated to raise interest rates, bolstering the allure of riskier assets, and amid a recovery in prices for commodities.

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