How Investors Can Cash In on Cuba

DailyFinance

Rick Aristotle Munarriz

After President Barack Obama last week proposed to relax trading restrictions with Cuba, the subject has been stirring plenty of debate on both sides of the political decision -- but investors know that they simply have to follow the money for a shot at success. There will be plenty of opportunities to make money if the decades-long embargo is effectively lifted, easing trade and travel between the U.S. and the island nation.

The knee-jerk reaction was for investors to bid up shares of The Herzfeld Caribbean Basin Fund (CUBA), a closed-end fund that was created two decades ago to benefit from either a free Cuba or at least one where restrictions are relaxed. The problem there is that the lightly traded fund is now worth a lot more than the value of its underlying assets.

Herzfeld's fund closed last week at $11.67, even though the total value of its stocks clocked in with a net asset value of just $8.21 as of Thursday's close. That's an insane premium. Do the right thing, and avoid chasing that fund higher. It has these spikes whenever there's a whiff of change in Cuba, and ultimately it trades back down below its net asset value. Besides, as an investor you can buy into the same stocks the fund owns at market price and without the fund's management fees. Let's go over a few of the stocks that are well positioned to make the most of the loosening of restrictions between the U.S. and Cuba.

Bon Voyage

It probably isn't a surprise that the biggest industry concentration for The Herzfeld Caribbean Basin Fund is the cruise line sector. Carnival (CCL), Royal Caribbean (RCL), Norwegian Cruise Lines (NCLH), and cruise ship spa operator Steiner Leisure (STNR) combine to make up nearly 15 percent of the fund's portfolio.

It's easy to see the appeal of the leading cruise lines. Cuba will make a no-brainer port-of-call for Caribbean-based sailings, and all three lines rely heavily on sailings that originate in Florida. Cuba's hotels, restaurants and customer service aren't exactly up to snuff with American standards, making cruise ships a more logical way to experience the island until it builds out its infrastructure and retrains its workforce.

It's not the only way to cash in on sea travel to the country, however. After all, for an island, imports and exports typically travel by water. Seaboard (SEB) and Copa Holdings (CPA) are two of the fund's three biggest holdings, and it's easy to see why. Copa Holdings is a leading provider of passenger and cargo services through Latin America. Seaboard has a strong ocean transportation business, but it also stands to benefit from other operations, including commodity merchandising, grain processing, sugar production, pork processing and electric power generation.

If You Build It, They Will Come

Getting tourists and goods in and out of the island will be huge, but let's not forget about the investments in infrastructure. Cuba is, in many ways, an island lost in time. Buildings and amenities need to be modernized. Roads need to be repaved.

Mexican cement producer Cemex (CX), South Florida homebuilder Lennar (LEN), and underground utility contractor MasTec (MTZ) are among the fund's largest holdings. It should be pointed out that MasTec gets its name from the now deceased Jorge Mas Canosa, the founder of the Miami-based Cuban-American National Foundation and the person that many Cuban exiles figured would usher in the era of a democratic Cuba after Fidel Castro's passing. MasTec is run by his three sons.

There will also be plenty of leisure and banking plays as Cuba's impoverished state improves with the flow of trade and tourism, but that will take time to play out. Sticking to cruise lines and the nearby infrastructure providers as the initial beneficiaries is what investors wanting to cash in on the movement should do with their money for now.