What "Cuba Libre" Could Mean for Investors

What "Cuba Libre" Could Mean for Investors
By JIM MCTAGUE
Plays on trade with Cuba.

IT TOOK COMMODORE PERRY A COUPLE OF YEARS to open Japan for trade with the U.S. -- and he threatened the island nation with bombardment by a naval task force. So don't expect the Castro brothers to throw open Cuba to U.S. trade and investment merely because of moves in Washington to relax a 47-year-old trade embargo. A spokesman tells us the Obama administration isn't expecting anything momentous soon, and it still isn't clear whether the Cuban government is truly interested in better relations.

Even so, the stars favoring freer trade are better aligned than at any time since Castro overthrew the island nation's pro-American dictator in 1959. First, in a goodwill gesture, President Obama softened the U.S. hard line by allowing more visits by Cuban-Americans and freer flows of cash and electronic goods like cellphones -- with more to come if oppressive Cuban laws are relaxed. Second, on a separate track, Congress is proposing a bigger goody bag for Cuba. New York Rep. Charles Rangel, chairman of the House Ways and Means Committee, talks about ending the embargo altogether in 2010, assuming health-care reform is over and done with. Republicans and Democrats on his committee have introduced bills ranging from partial lifting of the embargo to its total elimination, a position endorsed by the influential U.S. Chamber of Commerce.

Says Chamber President Tom Donohue: "Cuba's poverty is a direct result of half a century of Marxist mismanagement, but the embargo allows the Castros to blame it on Washington. Lifting it would remove their excuse for economic failure, and would help American farmers, businesses and workers -- as well as the Cuban people."

Raul Castro, now running the country, said in reaction to President Obama's gesture that he is open to discussing anything. But Fidel, father of the revolution, sounded a harder line. Donohue believes the brothers are playing "good cop, bad cop," and in their hearts would like to see more U.S. trade; Cuba already imports close to $700 million in agricultural products from the U.S. But thus far they have not made any conciliatory gestures of their own.

THERE IS A WAY TO TRADE ON this uncertainty. Tom Herzfeld's closed-end Caribbean Basin Fund (ticker: Cuba) rises or falls in reaction to the latest news flash concerning Cuba. This is because it invests in companies whose shares would be boosted by the embargo's elimination. The fund usually trades at a premium to its net asset value.

"When Fidel became ill about three years ago and went into the hospital, the stock spiked up," says Herzfeld, who operates in Miami, where he also has a money-management firm. But in 1996, when the Cubans shot down a Piper Cub operated by Brothers to the Rescue, killing its three occupants, shares of the closed-end fund dipped. In the past 52 weeks -- a period when all stocks were getting hammered -- shares traded at a high of $9.18 and a low of $3.11. They recently fetched $6.02.

The closed-end fund's holdings include Western Union (WU), which operates in Cuba, and home builder Lennar (LEN), which Herzfeld says has a business plan for the island. He avoids two Canadian companies active in Cuba -- Sherritt International (SHERF), which runs mines that Castro seized from Freeport McMoRan, and Leisure Canada (LCN.Canada), which develops properties on the island.

Freeport McMoRan (FCX) is one of his holdings because he believes that any thawing of relations will include recompense for its loss. Plus, the mining company will do well as the world's economy recovers and the demand for metals and gold increases.

The fund also has shares of Seaboard (SEB), which operates more shipping routes in the Caribbean than any of its competitors, and shares of Trailer Bridge (TRBR), a transport company in Jacksonville, Fla., whose ships have shallow drafts. (Only three of Cuba's 14 ports are deepwater.)

Herzfeld's fund also holds shares of Watsco (WSO), a Florida air-conditioning distributor; Norfolk Southern (NSC), which connects to the now privately held Florida East Coast Rail Road at Jacksonville; and MasTec (MTZ), a Florida-based infrastructure company founded by prominent Cuban-American Jorge Mas Canosa.

But the fund's home runs, if the embargo falls, could be Carnival (CCL) and Royal Caribbean Cruises (RCL), both of which already ply the Caribbean. Not only will they get a tremendous lift from passengers wanting to travel to Cuba, but their entire Caribbean business also should benefit when they add Havana, long shut down, as a port of call.

Rangel says that despite widespread congressional support, lifting the embargo won't be a slam-dunk. Old-line Cuban-Americans with political clout oppose ending it, as do some conservative members of Congress.

This could change overnight if Fidel Castro kicks the bucket. But while he's alive, don't hold your breath waiting for normal relations.

What "Cuba Libre" Could Mean for Investors - Barrons.com (29 May 2009)

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