Morgan Stanley sees some buying opportunities in certain Latin America stocks amid sell-off

Published Sun, Jun 12 20228:04 AM EDT

There are buying opportunities in Latin American stocks whose valuations have taken a beating despite strong fundamentals, Morgan Stanley found. The firm recently screened the 20-most liquid stocks in the region to find those whose earnings are up over the past year, while their forward price-to-earnings multiples have declined. From that search, the firm highlighted 11 names that met the criteria. "The list includes 4 commodity producing companies which have benefitted from historically high crude oil, lithium, protein and steel prices. … For these names, it makes sense for their valuation multiple to de-rate because investors normally believe historically high commodity prices should eventually mean revert," strategists led by Guilherme Paiva said in a June 6 note. "We are left then with 7 domestic oriented stocks for which the above mentioned argument is not valid." These stocks have on average "expanded their profits by almost 75% during the period while their forward price-to-earnings multiple has fallen by more than 40%. Consequently, the market has assigned a much lower implied earnings growth rate in perpetuity for these stocks." Here are four of the domestic-oriented names highlighted by Morgan Stanley: E-commerce giant MercadoLibre made the list, which the firm rates as overweight. The company's U.S.-listed shares are down 48% this year and are trading more than 64% below their 52-week high. Morgan Stanley also pointed out that earnings have quadrupled in the past year, but MercadoLibre's forward price-to-earnings multiple has fallen by more than 50% in that time. "Global eCommerce stocks have de-rated, but we see a disconnect. Supported by our proprietary industry model, we believe the Covid-related bump will not flatten the future eCommerce penetration curve," Morgan Stanley said in a separate note last month. Brazil-based investment management company XP Inc also made the list. Its U.S.-listed shares have fallen more than 27% year to date and have lost more than half their value in the past 12 months. Morgan Stanley found that the company's earnings have grown by roughly 40% year over year, while its P-E multiple is down more than 50% in that time. UBS upgraded XP to buy from neutral last week, citing an attractive valuation and hiked its price target to $37 per share from $31. "XP's valuation much cheaper than at other high-growth Brazilian companies," the firm said. Software company Globant made Morgan Stanley's cut as well. Its U.S.-listed shares are down 39% this year. Morgan Stanley found the company's earnings grew by roughly 50% in the past year, while its forward P-E tumbled more than 40%. Morgan Stanley also highlighted Banco Bradesco . The bank's U.S.-listed shares are up more than 20% in 2022. Morgan Stanley noted that its earnings grew by double digits over the past 12 months, while its valuation tumbled more than 20%. — CNBC's Michael Bloom contributed to this report.