Cuban Changes Could Offer Investing Opportunities

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Prospects for political change in Cuba are lifting hopes that U.S. companies and investors will be able to participate in the island nation's economic growth after Fidel Castro .

Castro, who has ruled Cuba since 1959, underwent gastrointestinal surgery and Monday temporarily ceded the presidency and leadership of Cuba's Communist Party to his brother Raul, the country's defense minister.

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The chances that Cuba would open to American investment remain distant. American companies and investors are prohibited from investing directly in Cuba under the restrictions of a 45-year-old trade embargo. Those sanctions would need to be lifted before U.S. interests could spend money in Cuba.

"It's an occasion, and an occasion produces possibilities," said Larry Birns, director of the Washington-based Council on Hemispheric Affairs.

Americans, however, can target specific companies in energy, tourism, agriculture and manufacturing that stand to benefit if the trade embargo ends. They can also invest in a mutual fund: The Herzfeld Caribbean Basin Fund (CUBA) , as its ticker symbol suggests, focuses on U.S. and international firms doing business in the Caribbean region that could extend their operations to Cuba.

"At least 75 percent of our holdings were selected with two criteria in mind: first that they should do well if there is no political change in Cuba, and second, they would experience a significant benefit to their business if the embargo with that country were lifted," fund manager Thomas Herzfeld said in an e-mail message.

Still, Monday's power shift in Havana is officially a temporary move, and Raul Castro, 75, may not produce meaningful change or any legacy. In addition, Cuba is a volatile and emotional political issue for the U.S., not only in Florida — home to most Cuban-Americans, who are largely anti-Castro — but also for conservative lawmakers and the Bush administration.

Cuba also has tight ties with Venezuela, which has replaced the former Soviet Union as Cuba's most important ally and trading partner. Cuba is also developing a close relationship with China, which is drawn to Cuba's oil and nickel reserves.

After the embargo

Lifting the trade embargo could establish the U.S. as a dominant force in Cuba's reconstruction, said Robbert van Batenburg, head of research at Louis Capital Markets, a New York-based brokerage firm.

"Winning Cuba would be a political victory" for the U.S., he said.

U.S. oil companies are also extremely interested in Cuba, but this is only one industry among many that would welcome an open door. Normalized relations with Cuba would also represent an economic victory for U.S. companies involved with sugar, tobacco, mining and tourism, van Batenburg noted in a research report to clients.

Among them: Freeport-McMorRan Copper & Gold Inc. (FCX). Cuba is one of the world's largest nickel producers, and, before the Cuban Revolution, Freeport-McMoRan owned the country's top nickel cobalt mine. Cuba has a joint venture with Canada's Sherritt International Corp. (S) to operate that mine, but van Batenburg said he expects Freeport-McMoRan to try to reclaim ownership.

Another potential beneficiary, van Batenburg said, is Imperial Sugar Co. (IPSU) . If the embargo is lifted, the U.S. may decide to import Cuban sugar, which could benefit U.S. sugar refiners, as the new supply could lower raw sugar costs.

One tobacco company van Batenburg likes in a post-Castro climate is Altadis S.A. (ALTDF) , a Spanish company that dominates the global cigar market. Altadis owns 50 percent of Habanos SA, a maker of prestige Cuban cigar brands, and the U.S. is the largest market for cigars, accounting for 50 percent of worldwide sales.

In tourism, the analyst pointed to another Spanish company, Sol Melia S.A. (SMIZF) , which is Cuba's largest hotel operator. Its yearly revenue from Cuba could double if U.S. tourists were allowed to travel to the island, van Batenburg said.

Close to Cuba

Herzfeld Caribbean Basin Fund reflects a broader approach to investing in Cuba. The portfolio is a closed-end fund, meaning that, unlike traditional mutual funds, it trades on a stock exchange at a premium or discount to its net asset value.

Before the recent events in Cuba, the fund traded at almost a 7 percent discount to its NAV, but the fund's share price rose sharply Tuesday and Wednesday, adding 10 percent and 9 percent, respectively, and trading at $8.69 by midday Wednesday.

The fund invests primarily in Florida-based and Latin American companies. Top holdings as of Dec. 31, the most recent data available, included a substantial stake in Florida East Coast Industries Inc. (FLA) , which is a major player in railroads and real estate. The fund also had a sizable position in Watsco Inc. (WSO) (WSOB) , which manufacturers air-conditioning and refrigeration equipment.

Other fund investments were made in Royal Caribbean Cruises Ltd. (RCL) , the popular cruise line that could find a new port in Havana, and Copa Holdings S.A. (CPA) , a Panama-based airline that has daily flights to Havana.

The Caribbean Basin Fund also has been researching companies that had property confiscated by the Castro government, and which might be able to reclaim those assets in post-Castro Cuba. One such investment is Cuban Electric Co. (CGAR) , a U.S. company that, Herzfeld wrote in a report to shareholders, has a U.S.-certified claim to about $267 million in confiscated assets, or about $74 a share, not including interest.

"Of course, whether or not any Cuban prior claims ... will ever be paid, even in part, is impossible to predict," Herzfeld wrote. "I do believe, however, that before the U.S. government would consider lifting the embargo, the subject of prior claims will have to be addressed."

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