Sometimes my job isn’t especially fun.
Like this weekend, when I perused the 132-page government document that outlines the parameters for Trump’s wall.
The document offers guidelines to contractors who wish to help build the wall.
Among the lines that caught my attention the most were (emphases mine)…
Free Reports:
>> “The wall design shall be physically imposing in height”
>> “The wall design shall include anti-climb topping features that prevent scaling using common and more sophisticated climbing aids (e.g. grappling hooks, handholds, etc.)”
>> “The wall shall prevent digging or tunneling below it for a minimum of six feet below the lowest adjacent grade”
>> “The wall fittings and fixtures shall be secured on the north side of the wall to shield from external attack”
>> The north side of wall (i.e., U.S.-facing side) shall be aesthetically pleasing in color, anti-climb texture, etc., to be consistent with general surrounding environment.”
So with the wall getting closer to reality, I asked my senior analyst, Martin Hutchinson, to gauge the situation.
Hutch surprised me with his analysis.
To find a hidden bull market, he told me to simply fly over the wall.
Hutch’s full report is below.
Smart investing,
Louis Basenese
Chief investment strategist, Wall Street Daily
Question: Martin, the Trump administration seems to be continuing along a path that will harm the Mexican economy. What are you seeing? Are you seeing the same thing as me?
Martin Hutchinson: Very much so. I think the Mexican economy is going to suffer in a number of ways from the Trump presidency — starting with possible tariffs against it.
Jobs are going to be brought back to the United States by U.S. companies because it’ll please President Trump. And by and large, the places they’re bringing them back from include Mexico, so there’ll be much less outsourcing.
Then we’ll see possible renegotiation of NAFTA, the North American Free Trade Agreement, and you better believe that that’s not going to be in Mexico’s favor.
And also, a wild card, we may see a possible border adjustment tax, which is Speaker Ryan’s proposal. And that would make Mexican exports to the U.S. nondeductible for U.S. corporate income tax. That would effectively add 20% to their cost, making Mexican manufactured goods very uncompetitive in the U.S. market.
Question: Bottom-line it for me. Is a prudent move here, Hutch, to avoid all investments with ties to Mexico, or are there maybe some green shoots?
Martin Hutchinson: There are some green shoots. I think there’s one sector that looks to do very well, and that’s tourism. There are a number of reasons for this.
A stronger U.S. economy, which we seem to be getting, will lead to more U.S. tourists. There were 7.16 million tourists by air in 2014, more than four times the number of Canadians, and 16 times the U.K. — which was third. There were 28 million visitors altogether, although that includes people going to Tijuana for the duty-free.
And the Mexican peso is down 10% in the last year, down 21% in the last two years. So that’s means that Mexican tourism deals are particularly attractive because costs are 20% lower. They’ve got a little inflation there, but only 3% or 4%.
Question: Interesting. Well what about the effect of the border tax, Hutch? Will that be hurtful or helpful?
Martin Hutchinson: I think that could help. It would push the U.S. dollar up, because everybody would adjust for that additional 20% cost. That would mean that the Mexican costs would be even cheaper in dollar terms. And then when a tourist buys a night in a Mexican hotel, he pays directly; there’s no business involved. Therefore, the border tax would have no effect. So Mexican tourism with U.S. individuals should be unaffected by the border tax. And it may benefit from it. So Mexican tourism looks like a very attractive sector to invest in right now.
Question: It’s kind of like you found a hidden bull market hiding inside of Mexico. If that’s correct, how do we play it?
Martin Hutchinson: Obviously, one would like to play it through a hotel chain, but the hotel chains are all private. Camino Real was listed for a few years, but got bought out.
But interestingly in Mexico, they privatized the airports some years ago. And those aren’t privately held and aren’t state-owned. One particular company is Grupo Aeroportuario del Pacifico (PAC). It operates 12 Pacific Coast airports, all the way up and down the Mexican Pacific Coast with all the resorts. So that’s a pretty attractive play. Its net income in the fourth quarter of 2016 was up 28%. Now, that’s not quite as good as it looks, because that 28% is in pesos. So it’s only 16% in dollars. But still, up 16% is up 16%.
The company’s trading on about 20 times projected 2018 earnings — if you look at forward traders’ projection of earnings. And it boasts a 2.1% dividend yield. That’s a pretty attractive way of playing what could well be a big bull market in Mexican tourism.
Question: Great sleuthing today, Hutch. I’ve got to give you credit. Thanks a lot.
Martin Hutchinson: Great pleasure. Thanks very much.
Question: This is Wall Street Daily signing off.
Good investing,
Martin Hutchinson
Senior Analyst, Wall Street Daily
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