6 Best-Performing Emerging Market ADRs

NEW YORK (TheStreet) -- A good way to enter emerging markets is through ADRs. An emerging market equity-fund manager at Pimco said the valuations for emerging market stocks are cheap. The firm is selectively accumulating positions in these markets.

Based on the MSCI Emerging Markets Index, stocks have been mixed with spots of buying opportunities. With Germany and France pledging support to the European banks, investor sentiment buoyed in emerging markets, taking the MSCI Emerging Markets Index to its biggest four-day gain in 16 months. From its 52-week low of 831.22 on Oct. 4, 2011, the index climbed 6.3% to close at 883.9 on Oct. 7, 2011. At close October 11, the index scaled up to 909.43.

A perfect buying opportunity came when the MSCI Emerging Markets Index slumped 31% with a P/E ratio of 9.4 on Oct. 5, 2011, reversing its 2011 high to hit its lowest level since Dec. 2008, according to data compiled by Bloomberg.

As of close on Oct. 12, 2011, the S&P 500 and Dow Jones gained 2.9% and 3.7%, respectively. Meanwhile, benchmark indices for emerging markets were mixed. India's Nifty added 2.8%, China's Shanghai Composite shed 1.3% and Brazil's Bovespa wiped out 3.3%.

A few emerging market American Depositary Shares generated lucrative returns for investors during the past month, while a few, as per analysts' estimates, have potential double-digit upsides over the next 12 months. We present six such stocks that gained 2% to 17% in the past month. These stocks have potential upside of 7% to 208%, according to the average estimates of analysts surveyed by Bloomberg.

The stocks are arranged in ascending order of one-month gains.


6. Dr. Reddy's Laboratories ( RDY), an integrated pharmaceutical company, focuses on providing therapeutics through its three business units: Global Generics, Pharmaceutical Services and Active Ingredients (PSAI) and Proprietary Products. The stock surged 1.8% during the last month.

Of the three analysts covering the stock, two recommend a buy and one rates it a hold. There are no sell ratings on the stock. Data from Bloomberg has analysts forecasting 33.1% upside to $41.80 in the upcoming 12 months.

In the past month, after the U.S. FDA approval, RDY launched Rivastigmine Tartrate capsules (1.5 mg, 3 mg, 4.5 mg and 6 mg), a bioequivalent generic version of Exelon capsules, in the U.S. market. The Exelon brand and its generic Rivastigmine Tartrate recorded sales of almost $92.6 million in the U.S. for the 12 months ended June 2011, as per data from IMS Health.

Industry analysts believe that export-oriented pharma companies will benefit from the INR weakening to its 28-month low. Companies like RDY earn more than 50% of their revenue from export sales and will benefit with the INR depreciating against major world currencies.

RDY recently declared its intention to expand its portfolio of over-the-counter drugs along with the acquisition of a pharmaceutical plant in Russia. The chief executive said in an interview to the Wall Street Journal that the company plans to increase the share of its OTC products to 40% to 45% from the current 28%.

5. Wipro ( WIT) is a global information technology services company operating in three segments: IT Services, IT Products, Consumer Care and Lighting. The company also provides outsourced research and development, infrastructure outsourcing, business process outsourcing and business consulting services. The stock has gained 4.3% in the past month.

Of the 10 analysts covering the stock, 70% recommend a hold and 10% rate it a buy. Analysts polled by Bloomberg expect the stock to gain an average 9.5% to $10.65 in the upcoming 12 months.

Industry analysts see Wipro's top line represent a sequential growth of 3% with the majority of IT companies benefiting from a depreciating INR. Additionally, Wipro is likely to reflect the significant improvement in light of its recent organizational restructuring.

Last month, Wipro was awarded the 2011 Microsoft Software Development Partner of the Year Award for providing highly customized solutions to support unique business practices. Besides, Voltas is likely to acquire the water treatment and purification business of Wipro, as WIT is seeking to exit smaller businesses that are facing increasing competition and are not easily scalable.

In the past month, the company announced an alliance with Saab AB for developing a market-protective software for the Swedish major's Land Electronic Defense System. Also, as Wipro is seeking investments in the education and health care industries, it is set to launch a range of low-cost products like an electro-cardiogram necklace, a tablet computer and cameras for use in hospitals and in the mining and retail sectors.

4. China Direct Industries ( CDII) manages a portfolio of Chinese entities providing consulting services to Chinese businesses. The company has three business units: Magnesium, Basic Materials and Consulting. The stock has gained 9.4% during the past month.

The single analyst covering the stock assigned it a buy rating. Data from Bloomberg has analysts forecasting 208.1% gains, to $3, in the next 12 months.

In the past month, China Direct Industries announced it has entered into a series of agreements to acquire 100% ownership interest in Golden Trust Magnesium Industry, and 80% ownership interest in Lingshi Xinghai Magnesium Industry. As per the agreement terms, CDII will issue up to 18.2 million shares of its common stock, transferring its $4.7 million interest in its subsidiary Excel Rise Technology and pay $4.8 million in cash, or repay one of its intercompany loans to complete the acquisitions in a deal totaling to $26.7 million.

To expand its magnesium operations in China and its U.S.-based commodities trading operations, CDII completed the sale of its 51% stake in Shanxi Pan Asia Magnesium Company for $3.05 million in cash to Bloomgain Investment Company, a privately held British Virgin Island company. Also, the additional capital will support its distribution capabilities in Mexico and South America in the next few quarters.

From September 21 to September 26, insiders bought a total 219,000 CDII shares in the open market for a total of $190,430. Additionally, on Sept. 29, insiders bought 148,775 shares of CDII on the open market in the price band of 86 cents to 96 cents, as per an SEC filing.

3. Itau Unibanco Holding ( ITUB), a Brazilian bank, has four operational segments: Commercial Banking, Itau BBA, Consumer Credit and Corporate and Treasury. The stock has gained 10% in the past month.

Of the 12 analysts covering the stock, 92% recommend a buy and the rest a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg expect the stock to gain an average 46.9% to $26.43 in the next 12 months.

Recently, ITUB was in talks to buy a part of HSBC Holdings' Brazil operations. Sources with knowledge of the matter say the deal would probably include HSBC's retail-banking segment, leaving it with only its wealth management and corporate-banking operations in Brazil. A similar deal was also struck between the two banks in Chile wherein HSBC agreed to sell its retail banking operations to Itau. The deal is expected to close in the fourth quarter this financial year.

Looking ahead, the company's CEO Roberto Setubal said 2012 profit will likely increase as interest rate cuts in Brazil help reduce loan delinquencies. Brazil's central bank expects credit to expand as total outstanding bank lending increased 1.7% in August to $1.05 trillion from July, and 19% from the prior-year period.

A money manager at BlackRock said his firm has bought shares of Itau and Banco Bradesco as they present an attractive buying opportunity, Bloomberg reports.

2. Embraer ( ERJ) engages in the manufacture and supply of commercial aircraft. The company has developed a line of executive jets based on one of its regional jet platforms. It supplies defense aircraft for the Brazilian Air Force and has sold to armed forces in Europe, Asia and Latin-America. The stock has gained 11.8% during the past month.

Of the 12 analysts covering the stock, 75% rate it a buy and the rest advise a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg expect the stock to gain an average 33.2% to $36.97 over the next 12 months.

Trefis reported that China's increasing wealth and government infrastructure spending will result in continued growth in domestic passenger traffic in the country. Boeing expects China's fleet size to triple over the next 20 years, requiring 5,000 new commercial aircraft worth $600 billion during the period. On September 26, Embraer went ex-dividend, with shareholders eligible for a dividend of 18 cents per share.

In the past month, Embraer received an order for 13 Legacy 650 executive jets from China's Minsheng Financial Leasing with first delivery to be made by the end of 2011 and the remaining within the next five years. The aircraft maker sold six planes to GE Capital Aviation Services in a deal valued $256.8 million. The deliveries, scheduled to commence by the end of 2012, will be included in the fourth-quarter pipeline. The deal could touch $500 million if Gecas opts for an additional six planes.

1. Infosys ( INFY) is a global technology services company offering business consulting, technology, engineering and outsourcing services to clients in more than 30 countries. It also provides software products to the banking industry. The stock has gained 17.2% in the past month.

Of the 19 analysts covering the stock, 37% recommend a buy and 58% suggest a hold. Analysts polled by Bloomberg expect the stock to gain an average 7.2% to $60.42 in the upcoming 12 months.

Infosys reported second-quarter 2011 revenue at $1.75 million, up 16.7% year-on-year and 4.5% sequentially. Net income for the quarter stood at $411 million, up 9.9% from the prior-year quarter, or earnings of 72 cents per ADR, increasing 10.8% year-over-year. Meanwhile, Infosys and its subsidiaries added 45 clients during the quarter.

In the past month, it was known that Infosys was in discussions to buy a U.S. firm for $450 million to $500 million. Sources close to the matter said the target company operates in the public services and health care space and generates revenue of $300 million to $500 million. Additionally, Infosys recently said it is seeking to acquire the health care business of Thomson Reuters for $700 million to $750 million.

Mid-September, Infosys BPO became the only player in the industry to win the CMO Asia Award 2011, for the second consecutive year, for Excellence in Branding and Marketing.

>>To see these stocks in action, visit the 6 Best-Performing Emerging Market ADRs portfolio on Stockpickr.

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