Profiting with the Spanish Conquistadors 2

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Established in 1924, Telefonica is Spain’s dominant domestic telecom with more than 16 million fixed lines and more than 22.4 million mobile customers. But Telefonica’s global footprint extends across three continents and 23 countries with a total population of 670 million. This conquistador planted its first flag in Latin America 15 years ago. Having invested more than Euro 70 billion ($103 billion) in infrastructure and acquisitions since the early 1990s, Telefonica today is the leading telecom in Brazil, Argentina, Chile and Peru. It also has substantial operations in Colombia, Ecuador, El Salvador, Guatemala, Mexico, Morocco, Nicaragua, Panama, Puerto Rico, Uruguay and Venezuela.

Outside of its home market of Spain, Telefonica also operates in the United Kingdom, Ireland, Germany and the Czech Republic. The company has amassed more than 35.8 million cell phone customers and close to 2.3 million landline accesses in the region. Last year, Telefonica won a bid to provide 3G services in Slovakia for a period of 20 years. The company recently launched a high-profile acquisition of a controlling stake in peer Telecom Italia SpA by teaming with a group of Italian investors. Apple also has selected O2, a U.K.-based cell phone provider owned by Telefonica, to launch the iPhone in Europe.

For an organization that is already the fifth-biggest telecom company in the world with close to 207 million customers, Telefonica’s profits are still expanding at a breathtaking rate. Just last week, Telefonica announced that its third-quarter net profit rose 39% year-on-year. Overall, net profit jumped to €4.02 billion from €2.9 billion a year earlier.

Telefonica’s results were boosted by a €1.4 billion ($2.05 billion) capital gain from the sale of a stake in TV producer Endemol NV and sustained growth in key Latin American and Spanish markets. This is all part of Telefonica’s strategy of selling non-core assets as it aims to strengthen its operations in Europe and Latin America.

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Also important to us, Telefonica is a stock that has held up remarkably well despite the recent market jitters. While global markets were volatile and flat last week, Telefonica actually hit a record high on Friday. So buy Telefonica at market today and place your stop at $82.50. For even bigger potential gains, buy the March 105 calls (TEFCA.X).

PORTFOLIO UPDATE

To make room for Telefonica, let’s close our position in the iShares MSCI Hong Kong Index (EWH) at a slight profit in the stock and a loss in the options. The mainland Chinese market has plummeted from its peaks and the bubble just might have been pricked, as the market’s progression now looks remarkably identical to the NASDAQ collapse in 2000. On a more fundamental level, Chinese authorities recently have announced short-term restrictions on mainland Chinese investments out of the country, which, in addition to global jitters, will act as a further cap on Hong Kong’s short term prospects.

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There are three words that I would use to describe the market’s behavior this past week: "noise, noise, noise" -- and lots of it. Our Global Stock Investor holdings endured some eye-popping volatility, with stocks like Potash (POT) selling off more than 20% on Friday and Monday, before bouncing sharply on Tuesday. And all this took place in the absence of any news specific to the stock.

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