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TheStreet Open House

3 Undervalued Stocks Based in Chile to Watch after Latest Presidential Election

Mary-Lynn Cesar, Kapitall: We looked for undervalued stocks based in Chile after the country re-elected Michelle Bachelet.

Former President Michelle Bachelet emerged victorious in Chile’s presidential runoff election on Sunday, propelled to victory by campaign promises of constitutional, fiscal, and educational reform. Bachelet, the candidate of the center-left New Majority alliance, won 62% of the popular vote, the highest percentage for any candidate since Chile resumed democratic elections in 1989. 

Read more about Latin America from Kapitall: Mexico Liberalizes Oil Fields: How Energy Stocks Could React

Bachelet’s New Majority alliance plans to tackle Chile’s high income inequality (PDF) by transforming the nation’s education, pension, and public health system with a new $15 billion spending plan. Chile’s current corporate tax rate stands at 20%, and Bachelet has stated that under the proposed rate of 25%, which will be reached gradually over her four years in office, Chile would take in an additional $8.2 billion.

Congressional hurdles

The biggest challenge to Bachelet’s proposed reforms lies in a deliberately suppressive electoral system created by dictator General Augusto Pinochet in the seventies. During last month’s congressional election, the New Majority failed to win an absolute majority in most districts; thanks to Pinochet’s electoral rules, anything short of an absolute majority in an electoral district means that the first and second place parties must split the district’s seats evenly.

This complicates Bachelet’s plans for sweeping changes as Pinochet’s rules mandate the following Congressional voting majorities for reform: 57% for educational, 60% for electoral, and 67% for constitutional overhaul. Presently, Bachelet holds a 57% majority in the Lower House and a 55% majority in the Senate, which is enough for her tax plan and little else.

Investing ideas

On Friday, global rating agency Fitch issued a press release stating Chilean banks have a stable outlook for 2014 and a modest economic recovery is expected for the nation in the coming year. Keeping Bachelet's landslide victory in mind, we decided to look for investment opportunities among Chilean firms that are similarly besting their peers. To begin, we constructed a universe comprised solely of stocks based in Chile that trade on US exchanges, which we narrowed down by screening for stocks with a return on equity (ROE) above the industry average. ROE measures a firm's profitability by expressing a company's profits as a percentage of shareholder equity.

Net income is a company’s profit (also referred to as total earnings) for an entire fiscal year, minus dividends paid to preferred stock. The preferred shares are also excluded from shareholder’s equity.

To further narrow down our list, we screened for undervalued stocks as indicated by a forward price to earnings ratio (forward P/E) below 15. Forward P/E uses a stock's current P/E ratio and its forecasted earnings to obtain a picture of a company’s future earnings growth. The formula is as follows:

Forward P/E = Market Price per Share / Expected Earnings Per Share

When a stock’s current P/E ratio is greater than its forward P/E ratio, this suggests that earnings are expected to grow in the future.

We were left with three stocks on our list.

Click on the interactive chart below to see sales data over time.

Do you think a corporate tax rate hike will have a negative impact on the future performance of these companies? Use the list below as a starting point for your own analysis.

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