The problems that can come with investing in emerging markets have been covered extensively this year. It's not just that people are worrying about slowing growth in China -- the high commodities prices that the Chinese building boom caused were an important component to a lot of the growth in Latin America and Asia as well.

And it probably didn't help when Fed Chair Ben Bernanke insinuated that tapering could come soon, and the stock markets in emerging economies all over the world tanked almost instantaneously.

However, an important thing to remember when you talk about emerging economies is that, theoretically, you're working on the assumption that they will some day emerge. 'Emerging' is a temporary condition. Just because this term no longer describes anywhere that isn't Europe or the US, doesn't mean there aren't still growth markets out there.

In fact, a number of factors are actually starting to suggest that Latin American stocks have a lot of room left to move.

  • In a development that has energy bulls salivating, Mexican President Enrique Nieto is considering liberalizing oil production.
  • 'Troubled economies' in Chile and Venezuela have turned out to be healthier in the third quarter than previously thought.
  • South America's other large economies, Brazil and Argentina, have beaten growth expectations this quarter as well.

Investing Ideas

It's still early to say anything definitive about the Latin American economy as a whole. But that's just a byproduct of the reality that emerging markets grow at different rates. We decided to run a screen on stocks from the region, to look for some investing ideas.

To get an idea about a company's growth prospects and valuation, we looked at levered free cash flow to enterprise value ratios (LFCF/EV). Levered free cash flow looks at a company's revenue once it has paid off all its outstanding obligations. Taken together with a company's size, this can be a good way to tell how much cash a company has on hand to expand and invest.

We found six stocks based in Latin America with ratios of levered free cash flow/enterprise value in excess of 10%, which may indicate that they are being undervalued. Consider them in relation to their market capitalization:

Do you see investing opportunities in stocks based in emerging economies? Use the list below as a starting point for your own analysis.

1. Alto Palermo S.A. (APSA, Earnings, Analysts, Financials): Engages in the ownership, acquisition, development, leasing, management, and operation of shopping centers, as well as residential and commercial complexes in Argentina. Market cap at $716.49M, most recent closing price at $22.74.

Levered free cash flow at $90.55M vs. enterprise value at $860.02M (implies a LFCF/EV ratio at 10.53%).

2. Companhia Brasileira de Distribuicao (CBD, Earnings, Analysts, Financials): Operates as a retailer of food products, clothing, home appliances, and other products through its chain of hypermarkets, supermarkets, specialized and department stores, convenience stores, and the Internet in Brazil. Market cap at $12.91B, most recent closing price at $49.61.

Levered free cash flow at $1.68B vs. enterprise value at $15.35B (implies a LFCF/EV ratio at 10.94%).

3. Cosan Ltd. (CZZ, Earnings, Analysts, Financials): Engages in the production and sale of sugar and ethanol products. Market cap at $3.93B, most recent closing price at $14.86.

Levered free cash flow at $826.60M vs. enterprise value at $7.72B (implies a LFCF/EV ratio at 10.71%).

4. Industrias Bachoco S.A.B. de C.V. (IBA, Earnings, Analysts, Financials): Operates as a poultry producer in Mexico. Market cap at $2.07B, most recent closing price at $41.46.

Levered free cash flow at $270.52M vs. enterprise value at $1.61B (implies a LFCF/EV ratio at 16.8%).

5. Administradora de Fondos de Pensiones Provida SA (PVD, Earnings, Analysts, Financials): Offers private pension fund administration and related services in the Republic of Chile. Market cap at $1.92B, most recent closing price at $86.90.

Levered free cash flow at $186.10M vs. enterprise value at $1.84B (implies a LFCF/EV ratio at 10.11%).

6. Telefonica Brasil, S.A. (VIV, Earnings, Analysts, Financials): Provides fixed-line telecommunications services to residential and commercial customers in Brazil. Market cap at $22.07B, most recent closing price at $19.65.

Levered free cash flow at $2.56B vs. enterprise value at $24.48B (implies a LFCF/EV ratio at 10.46%).

(List compiled by James Dennin. Quarterly sales sourced from Zacks Investment Research, all other data sourced from Finviz.)