BBD: BBD: Brazil's upgraded credit rating is huge

Buy: BBD, Target Price: $35, Time frame: 6 months Brazil being upgraded to investment grade quality opens up a whole new pool of capital to be invested into Brazil. And, basically, the financials will benefit the most. Brazil is simply under-owned in terms of international investments. Brazil has taken a back seat to the 'excitement' of investing in China. And, undeservedly so. Institutional money is simply making a large bet that Brazil will be the place to be for 2008, not China. It's definitely time to start investing in Brazil in order to tap into one of the next major growth stories that not enough investors are taking advantage of. Banco Bradesco (BBD) is one of the best ways to play Brazil. Banco Bradesco (BBD) is a private Brazilian bank that services individuals, small businesses, and institutions. They provide typical banking operations as well as insurance plans. BBD is one of the main holdings in the Brazil ETF mentioned earlier (EWZ). BBD makes up 7% of EWZ and is the 5th largest holding in the ETF. Banco Bradesco is largely responsible for much of the gains in EWZ. Over the past year, BBD is up 75%. And, 2008 looks quite bright for Brazilian equities considering the quick snap back they have seen after the sell off. The credit rating upgrade is further evidence that Brazil really is turning this around. Fundamentals: BBD has a market cap of $74 billion; clearly a large player in the industry. They are competing with Banco Itau to be the largest bank in Brazil. With a trailing PE of 15.8 and a forward PE of 13.1, BBD reflects solid valuation going forward and is actually cheap at these levels. Imagine that, picking up an emerging markets name that is actually 'cheap' on valuation. Its PEG ratio of 1.29 indicates that there is still room for growth and the quarterly year over year earnings growth of 28.8% echoes that. BBD has operating margins at a comfortable 24% and a return on equity of 29%. And, over the past few quarters, BBD's margins and returns on equity have actually increased, a very bullish sign for their business. Banco Bradesco simply shows solid valuation. Additionally, considering the growth they will be experiencing, you could argue that BBD is cheap here seeing as its price to sales ratio is only 2.43 (anything under 5 = undervaluation). The fundamentals look very strong for BBD. BBD also does not have a large institutional ownership presence, seeing as the Brazil growth story is really just beginning. But, after the credit rating upgrade, that will definitely change. Notable early investors and major shareholders include: BlackRock Group, Deutsche Bank, Morgan Stanley, and JP Morgan. Again, Brazil is simply under-owned here and we can expect institutional names to begin to build more positions in Brazil. But, here's the real treat. Although many investment banks might not be investing in BBD, some of the smartest and ahead of the game hedge funds are. In the most recent 13F filings that the hedge funds filed with the SEC, we see that some major players have added Brazilian financials to their portfolios. Atticus Capital is a $13 billion hedge fund ran by Timothy Barakett that makes very heavy bets on concentrated positions, has enjoyed success as being one of the most profitable hedge funds. In the last quarter, they quietly amassed a large position in BBD as they are betting Brazil will continue to boom big in 2008. Additionally, Caxton Associates, another major hedge fund, has accumulated a position in ITU over the past few quarters. Caxton is a $14 billion hedge fund who employs a global macro strategy. And, seeing as BBD is well positioned in Brazil, Caxton feels that Brazil is going to be a global force for the foreseeable future. And, actually, both these hedge funds have purchased big stakes in both ITU and BBD, the 2 largest Brazilian banks. So, these funds are not making individual company bets but rather a global macro bet on the majority of the Brazilian financial sector. Brazil really is taking off in terms of emerging markets. Soon enough, they will transition to 'emerged' market due to their dominance. Investing in China comes with a fear of a near-term top: the olympics. Brazil has no such fears. After this recent sell off, money quickly flew back into Brazil rather than China, illustrating that they think Brazil has a stronger future. Foreign banks offer safe exposure to the financial sector and access to international emerging markets. Unaffected by the United States sub-prime mess, foreign banks like Banco Bradesco (BBD) continue to flourish in a period of global growth and provide your portfolio with diversification in more ways than one. Add in the bonus of having some of the smartest and most successful hedge funds on your side and you've got a real winner. They seem to be making a global macro bet on the entire Brazilian financial sector and so you simply cannot bet against them because they rarely lose. Brazil's credit rating upgrade marks the positive steps their country and economy is taking to become a world power. Buy: BBD, Target Price: $35, Time frame: 6 months Follow my stock analysis and additional market commentary at http://madhatterstocks.blogspot.com/