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The 'Hyman Roth' play: Cuba-related stocks rally

Source: Wikipedia
Source: Wikipedia

Just like Michael Corleone's business partner in the "Godfather II," some investors want to make it big in Cuba . Shares of cruise company Carnival (CCL) and airliner Copa Holdings (CPA) were among the stocks boosted Wednesday on hopes that normalized diplomatic relations will lead to a rebuilding of Cuba and increased travel to the region. "This is a great opportunity for private equity investment in infrastructure and hospitality," said Tim Seymour, a hedge fund manager specializing in international investments. "To this point, the thematic plays on Cuba have been regarding energy and water infrastructure, with a dash of shipping. These remain the core public security exposure investors can find." Florida-based companies were many of the big movers Wednesday because of their proximity to Cuba and therefore the possibility for increased exports and new building contracts. Shares of Mastec (MTZ), a construction company based in Coral Gables, were higher. Builder Lennar (LEN) calls Miami home and had its shares bid higher in Wednesday trading.

Read More Viva cigars! Easing of trade with Cuba would be 'huge' Makers of cement such as Mexico's Cemex (Mexico Stock Exchange: CEME-MX) and Eagle Materials (EXP), based in Dallas, also got a Cuba boost. Starting a decade ago, those groups of stocks got a lift whenever rumors on the health of Cuba's former leader Fidel Castro started to spread around trading floors. Fidel's brother, Raul Castro, took over as president formally in 2008. One direct play is a small mutual fund named The Herzfeld Caribbean Basin Fund (CUBA), which sports the ticker "CUBA." A 10-year chart of the fund shows a rally from 2005-2006 as investors bet that an ailing Fidel Castro would lead to an opening of the country. It did not. Herzfeld Caribbean Basin Fund, 10-Years: Source: Factset To be sure, Wednesday's agreement brokered with Raul Castro does not end a trade embargo with the country and does not yet open the country for tourism. Those changes would need action by Congress. But always looking six months to a year ahead, traders aren't waiting for any official changes before betting on the shares. "A lot of people are going to want to go home, and a lot of people are going to want to visit Cuba," said Rhino Trading Partners' Michael Block. "Hotel companies will have a chance to build there." The Cuba news boosted shares of Carnival and competitors Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH) to near new highs for the year. "All three of the cruise lines under our coverage (Royal, Carnival, Norwegian) have a considerable amount of capacity operating in the Caribbean, and we believe an opening of Cuba could generate material incremental demand, both from repeat cruise customers and those new to the industry," Stifel analyst Steven Wieczynski wrote in a note to clients. Carnival said in a statement to CNBC: "Cuba is the largest country in the Caribbean, so there's some exciting possibilities from a cruise industry perspective. Some infrastructure for cruising already exists in the country, along with several ports, so it offers great potential, but there are other issues that will need to be taken into consideration if this market opens up." Normally, about 25,000 shares in the Herzfeld Caribbean Basin Fund change hands. Early afternoon Wednesday, volume was greater than 19 million. The fund is "focused specifically on companies that are poised to benefit from the resumption of U.S. trade with Cuba, once the U.S. embargo prohibiting trade with that country is eased or lifted." The "CUBA" fund's largest holdings are Copa, Coca Cola Femsa (Mexico Stock Exchange: KOFL-MX), Seaboard Corp (NYSE MKT: SEB), MasTec, Lennar, Royal Caribbean and Watsco (WSO) Inc.

Read More Obama opens door to new relations with Cuba Wednesday's announcement comes as no surprise to the managers of the fund, Thomas Herzfeld and Erik Herzfeld, as they wrote the following in the fund's annual report posted in June: "Extreme inflation and rapidly increasing poverty have led to continued economic and political volatility in Venezuela . This, coupled with plummeting oil exports and declining production levels for the nation, may force Venezuela to reconsider its policy of supplying subsidized oil to Cuba. As a result of this pressure on its economy, the Cuban regime may be more amenable to U.S. diplomatic overtures, even though relations between Cuba and Russia have been warming." Investors should be cautious when seeking plays related to normalized Cuba relations. While the aforementioned companies and funds have a legitimate chance to profit from a free Cuba, some of the securities moving on Wednesday do not have much to gain. For example, shares in the Cuba Beverage Company (CUBV) jumped more than 100 percent to 4 cents a share midday Wednesday. The stock, which trades over the counter, has a market capitalization of just $3.7 million. Going by the company's website, it has nothing related to the country other than its name. The maker of "herbal energy juice" is based in San Diego.