How to Invest in Cuba – Does Obama’s Cuba Deal Spell Gains?

by Darwin on April 13, 2009

Following the Obama administration’s projected removal of Cuba travel restrictions for Cuban-Americans to Cuba, the allowance of Cuban money transfers, and easing the commercial embargo by allowing U.S. telecoms to apply for licenses to operate in there, Cuba vacations may become a common phrase in the American lexicon.  While it’s premature to declare a complete sea change in the US-Cuban policy, Obama had previously projected his intentions to ease the rigid stance America has had toward the dictator-led island and evidently, he is following through on his plan to eventually ease the stance toward Cuba on many fronts.

How to Invest in Cuba?

Unfortunately for US investors seeking investment in Cuba directly, there is no pure play US ADR.  Further confusion is added by the myriad investments that claim to be “Cuban Investment Plays”  While many individual stocks may benefit from a new Cuba-US relationship, the correlation for many is dubious at best.  For instance, if an airline that has routes to Cuba runs up on the news, is that a viable long term investment?  Cuba may be a small portion of its routes and if the Obama administration is opening up lines of commerce with Cuba, it’s likely that other airlines would add routes as well, diminishing any monopolistic domination of the destination.  The closest play on investing in Cuba is a closed end fund with a ticker as none other than (CUBA).  Note however, that the fund holds 0% of actual equities based in Cuba itself, as there are no publicly traded entities to be had.  The Herzfeld Caribbean Basin Fund gained 41% in today’s trading on the news of the potential for Cuba travel and investments from the US.  In looking a the Fund’s holdings, it’s evident that the fund is clearly not a CUBA pure play investment, but rather, it seeks to exploit a trend toward warming Cuba relations that would benefit multiple companies in the Caribbean Basin Countries and the United States that would theoretically benefit from investment and tourism in Cuba.  The specific mission statement from the holding company is as follows:

“To achieve its objective, the Fund invests in issuers that are likely, in the Advisor’s view, to benefit from economic, political, structural and technological developments in the countries in the Caribbean Basin, which consist of Cuba, Jamaica, Trinidad and Tobago, the Bahamas, the Dominican Republic, Barbados, Aruba, Haiti, the Netherlands Antilles, the Commonwealth of Puerto Rico, Mexico, Honduras, Guatemala, Belize, Costa Rica, Panama, Colombia and Venezuela.  The fund invests at least 80% of its total assets in a broad range of securities of issuers including U.S.-based companies that engage in substantial trade with, and derive substantial revenue from, operations in the Caribbean Basin Countries.”

The Fund’s holdings were as follows from the last Annual Report:

Seaboard Corporation 6.87%
Consolidated Water Co. 4.98%
Watsco Incorporated 4.78%
Carnival Corp. 4.56%
Norfolk Southern Corporation 4.16%
Coca Cola Femsa, S.A.B.
de C.V. ADR 4.05%
Bancolombia, S.A. 3.99%
America Movil, S.A.B.
de C.V. ADR 3.89%
Atlantic Tele-Network, Inc. 3.73%
Teekay Corporation 3.50%

Is Cuba as a US Vacation Destination for real?

Well, currently, Cuba hotels are ill-equipped to handle the hoards of American travelers that tend to flock to Caribbean destinations once the cruise lines and airlines set up routine routes.  Even during an interview with Cuba’s travel minister, she was rather non-committal on whether Cuba hotels could handle the volume America may be about to send their way.  Based on anecdotal interviews on the street with Americans and Canadians that had previously traveled to Cuba, they weren’t exactly lit up over the “top notch” hotels available there.  In my mind though, markets are efficient and if there is a project demand, investment in Cuba will pick up rapidly and entrepreneurial dollars will flow into the economy to capitalize on the rapid growth projected.  For those fearful that this may be an Obama pet project without long term US support, once the boarders start to open, barring some sort of self-destructive behavior on the part of Cuba’s leadership, it’s unlikely that public opinion would sway the other direction.  This is probably the start of a long term trend toward stronger Cuba-US relations and Cuba travel.

Should I invest in the Cuba closed end fund?

My opinion is that the valuation of the fund is getting way ahead of itself.  As markets tend to overreact and subsequently over-correct, I envision possible additional followthrough tomorrow and but then reality will set in and the fund will return to a more reasonable premium to net asset value, which means a major decline from current values.

Disclosure: During the runup of 40%+ today, I did take an active position in CUBA and provided a twitter update for followers to capitalize on the momentum (follow my twitter).  I intend on trading back out of it quickly, as I do believe the fund’s valuation is getting way ahead of itself.

Financial information for the CUBA fund can be referenced here, but the download process is rather laborious given multiple Adobe software updates required.

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