Cuba: A New Frontier for American Investors?

 

By Nancy Zambell 

Chief Analyst, Investment Digest

and Dividend Digest

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Cuba: A New Frontier for American Investors?

Infrastructure, Hotels and Cruise Lines

Herzfeld Caribbean Basin Fund (CUBA)

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On December 17, I couldn’t believe my ears when I heard the news that the United States was (finally) embarking upon negotiations to normalize diplomatic relations with Cuba and even open an embassy.

There have been stabs at easing the 1960 embargo over the years, with secret negotiations by every President, including and since JFK, and more publicized ones by President Carter, during the 1970s, and President Obama as recently as 2009.

But this latest announcement is the biggest step so far, and I believe it will have economic and investing repercussions for decades to come.

I had the opportunity to visit Cuba around the turn of the millennium, and I am so glad I did! I went there to look over a resort company that had secured rights to several Cuban properties, with the intention of building mega-resorts to lure tourists from countries that currently traded with the island nation, but—more importantly—to set itself up for a time when the US-Cuba embargo was lifted.

At the time, the company had not broken ground on any of the developments (it never did!), but I had a grand tour of the island, including:

• Oceanfront properties in Jibacoa, about 65 kilometers east of Havana, which was slated for six luxury hotels as well as two PGA championship golf courses.

• Cayo Largo, an island 50 kilometers south of the main island, where I snorkeled, ate freshly-caught lobster, and sat on some of the most incredibly beautiful—and mostly untouched—white sand beaches.

• Monte Barreto, an oceanfront locale smack-dab in the middle of Havana’s business and trade district.

Yes, the island was hopelessly out-of-date, with few restaurants and automobiles that hearken back to the 1950s. And while Havana was quaint, there was much beauty in the cobbled streets of the old town. U.S.-Cuban trade may have been at a standstill during the years of the embargo, but that hasn’t been true for other countries. While I was there, I saw hotels that had been developed by Spanish and Canadian operators (although they were essentially owned by the Cuban government, who granted the hoteliers a license to operate). And since my visit, hotels have popped up in each of these locales.

The Spanish Melia, Iberostar and Canadian Royalton Luxury brands have all expanded their reach, but in reality, with just a bit more than 300 hotels and 51,000 rooms currently available, the investment opportunity for hotels remains tremendous.

So don’t be too surprised when you see Hilton and Marriott (MAR) get in line, once restrictions are lifted. And the major airlines will get a boost, too.

It won’t happen overnight, as the embargo is still in place, but Obama’s plan to open the island to travelers in 12 categories, including family visits, educational activities, journalists, professional research/meetings, and public performances, should be the first step in eventually eliminating the embargo. And once that is erased, the sky’s the limit!

But before any wholesale hotel development, the country will need substantial upgrades to its infrastructure. Cuba’s roads, utilities and airports have basically stood still since the late 1950s. The process of upgrading its infrastructure for the 21st century will provide enormous opportunities to companies like cement suppliers, construction and engineering firms, and utility contractors.

However, some of the first beneficiaries—even before the infrastructure and hotel opportunities—will be the cruise lines currently servicing the Caribbean. Right now, only German-owned Thomson Cruises, Norwegian-owned Fred. Olsen Cruise Lines, U.K.-owned Noble Caledonia and Canada-owned Cuba Cruise currently stop in Cuba. Just think of the economic ramifications when Royal Caribbean (RCL), Carnival (CCL) and Norwegian Cruise Lines (NCLH) make Cuba a regular itinerary.

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But all those investment opportunities are down the road. Right now, the primary investment vehicle that Americans can use to access Cuban opportunities is Thomas Herzfeld's Herzfeld Caribbean Basin Fund (CUBA), which soared 35% after Obama made his announcement. However, once investors realized the embargo wasn’t lifted, the fund came back down to earth, although it’s still trading above its recent levels.

CUBA is a closed-end fund, with about 13% of its portfolio in the cruise line industry, including Carnival (CCL), Royal Caribbean (RCL), Norwegian Cruise Lines (NCLH) and cruise line spa operator Steiner Leisure (STNR).

Here are the fund’s top 10 holdings, according to Morningstar:

As you can see, in addition to the cruise lines, the fund’s holdings include infrastructure (CWCO, MTZ), and construction (LEN) companies, too—all companies that would be poised to benefit once the gate opens into Cuba.

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I’m not yet on the “invest in Cuba right now bandwagon,” as there are still some barriers. Currently, the U.S. exports $300 million to $500 million in food, agricultural and medical supplies to Cuba annually, and tourism should be the first beneficiary.

But the necessity to pay Cuban workers via the government, as well as the dual currency system of the peso and convertible peso, remain impediments to immediate investment. And we can’t forget the $7 billion for 5,913 claims for confiscated property after the revolution, which must be settled prior to lifting the embargo (unless exceptions are made).

Yet, I wouldn’t discourage a wee bit of investment in this fund—just as a speculative bet on the future. But remember, as a closed-end fund, CUBA can trade at a discount or a premium to its net asset value. If you’re a newcomer to these types of funds, here’s a primer from the SEC: http://www.sec.gov/answers/mfclose.htm.

The opportunities in Cuba will be tremendous—a new frontier for American investors. I can’t wait to see how they develop.

Sincerely,

Nancy Zambell
Editor of Investment Digest
And Dividend Digest


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