Cuba minus Castro may be plus for investors

Cuba minus Castro may be plus for investors
By Brett Arends/ On State Street
Tuesday, November 22, 2005

It will be about four hours direct from Logan to Havana. 

But when flights resume, good luck trying to find a seat in business class. It will be packed with professional investors from downtown, getting in on the gold rush. 
That day seems closer following last week’s reports about Fidel Castro’s health. 
They suggested Cuba’s president, who is 79, may have Parkinson’s. 
Fortunes have been made in Eastern Europe since communism collapsed there. Cuba is much smaller – but then, it has had even less investment. 
And it has one huge advantage: It’s a big tropical island, close to the East Coast of the United States. The investment opportunities are obvious. 
Miami, Fla.-based investment manager Thomas Herzfeld has been preparing for this for 11 years. 

His Caribbean Basin fund (ticker: CUBA) invests in companies poised to cash in when the embargo is lifted. 
His main holdings: Florida East Coast Industries, which owns the freight railroad from Jacksonville to Miami; cement producers Florida Rock and Mexico’s Cemex; Cayman-to-Bahamas utility Consolidated Water; regional air-conditioning distributor Watsco; and Seaboard Corp., which has shipping and agribusiness interests in the region. 
He also likes Florida shipping company Trailer Bridge, Inc. because it has a fleet of shallow-draft vessels. Few of Cuba’s ports can handle deep ships. 
He’s holding Carnival and Royal Caribbean cruise lines. “They’re in the best position,” he says. When they can add places like Havana and Santiago de Cuba to their itineraries, “we think their business could double” 
He says these companies are already doing well without any extra business from Cuba. The fund is up 41 percent in the last year. 

Herzfeld is also spicing up the portfolio by acquiring some outstanding property claims there – which he buys on the cheap, in the hope a new government will settle them. 

Herzfeld has good ties with Cuban-Americans in southern Florida. Some have been selling their claims against the Cuban government for as little as three cents on the dollar, which suggests they are giving up hope of getting their money back. 
Apparently there’s a lively market. 
What are Herzfeld’s investment plans when the regime changes? “The companies in our portfolio are likely to rise sharply if the embargo’s lifted,” he predicts. 
He’ll look to cash out – and plow the money into joint ventures on the island. 
The biggest risk? This could be 15 weeks away – or 15 years. 
The shares have returned a modest 3.9 percent annually since the IPO in 1994. Annual fees are 3.55 percent. 
But at $6.80, last night, they trade at just 87 cents on the dollar. 
Following yesterday’s news, General Motors stock now offers a dividend yield of 8.3 percent. The bonds pay as much as 12 percent. Many – such as preferred issue GMS, which trades on the stock market like a share – sell for 64 cents on the dollar. 
Is this a bargain? 

Only as a substitute for “going to Foxwoods or Atlantic City” says Margie Patel, portfolio manager and junk-bond specialist at Hub funds shop Pioneer Investments. 
When buying junk bonds, she says, don’t look at the dividends: Look at whether you’re likely to get your principal back. Compared to that, the yield is pretty much irrelevant. She doesn’t own any car company’s bonds in her fund. 
Billionaire Kirk Kerkorian ran the numbers back in the spring and decided GM stock was worth at least $31. He’s either right or he’s out hundreds of millions of dollars: It fell another 47 cents yesterday to just $23.58.

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