Nook and Cranny Investing: Arcos Dorados Holding Inc (ARCO)

For emerging markets, I see South American fast-food franchisee Arcos Dorados Holding Inc (NYSE:ARC) capitalizing on the biggest brand name in fast food with plans for revenue growth between 10% to 15% annually. A relatively strong U.S. dollar and devalued local South American currencies have depressed earnings in the past, resulting in the stock losing roughly 40% since its 2011 IPO. But the potential for growth as the top chain within a region of 500 million people makes its forward P/E of 18.6 look appetizing.

Grantham gives the highest praise to forestry and farmland opportunities, even if they are deemed a bit expensive like everything else. I like Adecoagro SA (NYSE:AGRO), which produces corn, wheat, soybeans, rice, dairy products, sugar, ethanol and electricity products in South America, giving it diversification to protect it from any single negative commodity trend. It also trades at a forward P/E of 13.7. And if you like the seal of approval from well-known investors, George Soros now owns over 20% of the company.

Forestry stocks have dramatically increased in share price with the housing market, and each of them have a unique mix of revenue sources. Some are more heavily weighted toward real estate, like Pope Resources L.P. (NASDAQ:POPE), which earns a third of its revenue from real estate. Others rely on other sources of revenue, such as Rayonier Inc. (NYSE:RYN) , which gets 70% of its sales from cellulose products used to make a variety of goods like diapers, paint, pharmaceuticals, and digital displays versus just 3% from real estate. Since last May, Pope’s shares are up twice as much as Rayonier’s. A majority of publicly traded timber companies also operate as REITs, which gives them a special tax status of which investors should be aware.

The loose change of the stock market
Grantham doesn’t see much upside even in the hidden potential of the nooks and crannies. High returns, to him, are going to be tough to achieve, and the goal will be avoiding the worst of the market. He believes the market might continue to bid up stock prices, and timing a fall will be tough. Being cautious in the nooks and crannies might not reward you in the near term, but could save you from a major correction.

The article Nook and Cranny Investing originally appeared on Fool.com and is written by Dan Newman.

Fool contributor Dan Newman has no position in any stocks mentioned. The Motley Fool owns shares of Arcos Dorados. Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.