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Cuba: An opening, but no day at the beach

Thawing politics present opportunities for investors

Globe Investor Magazine Online, April 27, 2009

Cuba, with its plentiful dark rums, white beaches and fine cigars, is a magnet for sun-deprived Canadians come winter, but its decades-old political spat with the United States has largely kept foreign investors away.

There is speculation that's about to change given that the Obama administration has already eased some restrictions against the Western Hemisphere's last communist nation. Cuban-Americans can now freely visit and send money back to their homeland and U.S. telecom companies are able to secure operating licences.

While the 47-year-old U.S. trade embargo on Cuba remains, President Barack Obama's latest actions could be just the first steps toward a more open relationship between the two countries. For some well-positioned companies, these closer political ties could add up to extra business.

The options are pretty skinny for those wanting to gain broad exposure to Cuba without individual stock picking. One possibility is the Herzfeld Caribbean Basin Fund, CUBA a closed-end fund trading on the Nasdaq that has been focusing on Caribbean investments for the past 17 years.

Its share price surged more than 40 per cent to about $8 (U.S.) after Mr. Obama lifted some of the restrictions on Cuba earlier this month, but has since fallen back to $6.18, still nearly double its early March lows.

Mr. Obama's actions "seem to put relations on course for a lifting of the U.S. embargo and full relations with Cuba," said Thomas Herzfeld, president and founder of Thomas J. Herzfeld Advisors Inc., which runs the fund. The next important political step, he said, will have to come from Cuba: the freeing of political prisoners.

The fund's strategy has shifted since Mr. Obama took up residence in the White House. Previously, it aimed to identify companies in the Caribbean that would do well regardless of whether the U.S. resumes normalized relations with Cuba. Now, it is focusing on stocks best-positioned to gain if the U.S. embargo is lifted, even if they are currently not making money.

"I think for the average investor, they might want to take a more conservative strategy and pick companies that are doing well and have good prospects regardless of changes in Cuba," Mr. Herzfeld said. "For aggressive investors, they might want to do what we're doing now, which is buy more speculative companies that have more of a Cuba play." Among his top holdings are those in the transportation business: Seaboard Corp., which operates containerized shipping services throughout the Caribbean; and Norfolk Southern Corp., a rail carrier in the eastern U.S. that could move goods southward into Florida for export.

He also likes tourism stocks, especially cruise line operators such as Carnival Corp. and Royal Caribbean Cruises that would see an influx of new passengers if the U.S. allows its citizens to travel to the country.

One of the drawbacks to the Herzfeld fund is it is restricted under current law from holding companies that have business dealings already in Cuba. So left out are names such as Sherritt International Corp., which has mined for nickel and cobalt in Cuba for years, and luxury resort developer Leisure Canada Inc. Both are based in Canada.

Another closed-end fund, Ceiba Investments, listed on the London Stock Exchange, offers more direct exposure to Cuba. It buys stakes in Cuban joint ventures, unlisted companies and in Cuban interest-bearing securities.

Stuart Culverhouse, of the London-based frontier-market investment banking boutique firm Exotix, says placing investment bets on Cuba is still most suitable for those with a healthy appetite for risk.

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