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How To Short Emerging Markets

Written By Brian Hicks

Posted May 4, 2009

I’ve got a dirty secret about a lot of emerging market investments. . .

They’re in emerging markets.

In Brazil, 30 million people have risen up out of poverty since 1995, creating opportunities for themselves and investors abroad.

Nevertheless, where people aren’t used to having money, they aren’t used to paying for certain services.

Of course in Brazil, where I’m reporting from right now, there is still plenty of money to be made if you’re an international investor.

But you have to know how new consumption plays out in developing countries.

Today I’ll highlight one stock that I think may be a good candidate for a short play because of the street-level research I’ve done here in Brazil.

The Cat that Eats Profits

“We have a cat,” my friend Zulu told me yesterday. “The cat gives internet to my house and many other houses.”

“Huh?” I puzzled, wondering if I missed the news reports about a feline that lays fiber-optic cables.

“We get television from the cat, too,” Zulu continued. “It’s great!”

In the favelas, or hillside shantytowns, of Rio, there’s a computer and TV in nearly every house.

It’s a sign of the 5%-and-greater GDP growth Brazilians have enjoyed in recent years. And it’s a credit to President Lula da Silva, who came from humble beginnings as a peanut vendor to ensure that Brazil’s economic expansion is shared.

But the widespread presence of o gato (the cat) — you and I know it as a signal splitter — spells trouble for U.S.-traded stocks of Brazilian broadband internet and cable providers like Net Servicos de Comunicacao (NASDAQ:NETC).

NETC stock has rocketed up to P/E ratios upwards of 100!

That’s based on enthusiasm that the company is expanding into previously unserved or underserved areas.

Heck, I’ve even recommended the stock successfully in this publication as a way to profit from Brazil’s IT revolution (double-digit gains in just weeks!).

At that time, though, I had yet to see the favelas with my own eyes and get the inside scoop from people who call hills like Arvore Seca (Dry Tree) and Ceu Azul (Blue Sky) home.

This is precisely why I travel to do intensive research.

Simply put, if NETC stock is priced for mega-growth because millions of customers in favelas will add to their balance sheets, you need to short it.

Stealing cable isn’t unique to Brazil, necessarily, but since being here I’ve also learned how to avoid paying for internet, electricity, and even water!

So, I’m telling you this today so you can avoid a brutal earnings surprise in the future. . .

And possibly make a boatload from the downside at the same time.

My colleague Ian Cooper of Options Trading Pit has agreed to spend time with me hand-selecting emerging market stocks that are primed for a fall.

Ian’s got a track record of frequent triple-digit gains and a win rate that beats anyone in the business.

I’ve got years and years of foreign soil under my shoes (and sandals, here in Rio) and language skills that take me far away from the investor-relations shills and into the nooks and crannies of the world’s hottest markets.

Check out Options Trading Pit today and be the first to tap into our powerful worldwide options strategy for overinflated international stocks.

Click here to learn more:

Wishing you muito êxito (lots of success) from Rio,


Sam Hopkins