Time to Buy Brazilian Stocks?

  • A 30% market decline tells me there is perhaps an opportunity.
  • The key is to find long term fundamental values, good businesses and wait for better times that eventually come.
  • However, a proper investment strategy must be implemented as nobody can know where the bottom will be.

Video here, article below!

I’ve been looking at my screens and, apart from solar stocks, another sector deep in the red has been Brazil. I made such nice returns in 2016 and 2017 from Brazilian stocks that when I see all that red, I start to smile again as opportunity knocks. I hope to share with you the strategy that produced the returns I had enjoyed. One example:

Figure 1 My articles on SA on CEMIG – “Be greedy when others are fearful.”figure 8 example

Source: SA

It is time to take another look at what is going on in Brazil, what the investment opportunities are and what the best investment strategy to minimize risk and maximize returns is.

Brazilian stocks – general overview

Following the FED’s interest rate hikes, the first cracks started showing up in emerging markets. Countries and companies that are burdened with U.S. denominated debt, but book revenues in their weakening domestic currencies, are squeezed by the two headwinds.

Further, crucial to emerging markets is sentiment. Volatile sentiment creates extremes, presenting opportunities for contrarians. More about that later.

Take a look at how volatile the Brazilian ETF has been. It was a 15-bagger from 2002 to 2008, only to drop 70% in the final year of that bull run. There was another bull run in 2009, followed by a long decline that ended in January, 2016. Since then the Brazilian stock market boomed again, only to drop 30% over the last six months.

Figure 2 Brazil ETF (EWZ) historical chartfigure 1 brazil

Source: iShares

I don’t know where the bottom of the current decline will be. The only option we have is to look at the fundamentals of possible investments and their relation to what is going on in Brazil. This leads to finding out their risk versus reward and intrinsic values. The goal is to find a good business that we can feel confident about averaging into if necessary.

Brazil – economic overview

There are two ways to look at an economy. One is to follow the headlines that are spreading panic or enthusiasm, depending on what appears to sell and lead to clicks. The other is to take a deep dive into key indicators and long-term trends. Let’s start by discussing the news.

Brazil – short term view

The Brazilian general elections are coming this October and the Central bank has been having issues trying to keep the Real stable.

Figure 3 BRL to USD 5-year chartfigure 2 brl usd 5 year

Source: Bloomberg

Versus the dollar, the Brazilian currency depreciated 50% from mid-2014 to January 2016, then stabilized for about two years. As it became clear that interest rates would continue to rise, the Real has lost ground again during 2018. Currency volatility has a significant impact on our investment returns and has to be watched carefully.

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The Brazilian currency has been weakening due to the current emerging market sell-off that usually creates a selling spiral because nobody can see a bottom; thus the trend is self-reinforcing. Further, the weaker currency leads to lower economic expectations that, in combination with shallow financial markets, creates an extremely volatile environment. And, as we know, markets do not like volatility and uncertainty.

The Brazilian Central Bank is protecting the currency with foreign exchange swaps and has offered $26 billion in the previous week. As always, investors wonder how long the Central Bank will be able to do that.

The above, in combination with a truckers’ strike that brought to a weekly transportation stop in the whole country during May 2018, has led many economists to cut their growth expectation for the remainder of the year.

Figure 4 Growth expectations for the Brazilian economyfigure 3 economoy

Source: Bloomberg

Regarding the elections, markets hate, which is exactly what we have. The leader in the polls is the jailed former president, Lula. Without him, the highest number of votes would go to a right-wing candidate. Regardless, there is no clear outcome.

Figure 5 Brazilian election polls without Lulafigure 4 bolsonaro

Source: BNP Paribas

Because nobody knows what will happen, I like to make my investment analyses as if the worse will happen. This means that economic growth stagnates (perhaps to the point of recession), the currency loses another 25% of its value and then next political leader is from a business-unfriendly party. If I find a stock that would still deliver a nice business return, perhaps even a dividend, in such an environment, then I have a strong buy. Before digging into stock analyses, let’s evaluate the long term economic perspective.

Long term economic view on Brazil

It is very easy to lose sight of what is important when there is so much news about things that don’t matter. The important thing is that life in emerging markets goes on no matter what, gets better year by year and people continue to live as always (except for Venezuela). Plus, people in emerging markets are much more used to volatility than people in developed economies. Let me show you a few charts.

Despite the Brazilian stock market still being 65% below its 2008 peak, things have improved there during the last 10 years. For example, households’ internet access went from 23% to 70% and is still increasing.

Figure 6 internet access in Brazilfigure 5 internet access

Source: BNP Paribas

An indicator I like even more is energy consumption. It shows how the real economy is developing independent of the temporary economic swings and market sentiment.

Figure 7 Electricity consumption in Brazilfigure 6 electricity consumption

Source: CEIC

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Let’s evaluate investing opportunities while keeping in mind the volatility and possibility of extreme negative sentiment that can hit such markets.

Investment opportunities

The Brazil ETF (EWZ) already has better than average fundamentals, but it is important evaluate its holdings.

Figure 8 Brazil ETF fundamentalsfigure 7 Brazil etf

Source: iShares

The stocks are dividend into those directly traded on the NYSE or NASDAQ and on OTCPK.

Figure 9 Brazilian stocks traded directly on American Exchanges

PE PB Comment 1 AMBEV S.A ABEV NYSE Beverages 34.32 5.99 GOOD COMPANY – EXPENSIVE COMPANY 2 Azul AZUL NYSE Airlines 46.95 2.48 BRAZILIAN AIRLINE TO CHECK 3 Banco Bradesco BBD NYSE Banks 9.82 1.49 A look at banks in general necessary 4 Banco Santander Brasil BSBR NYSE Banks 26.44 2.44 A look at banks in general necessary 5 BrasilAgro LND NYSE Real Estate Inv&Serv 5.89 1 Small cap to watch on volatility and value 6 Braskem BAK NYSE Chemicals 10.19 4.91 Potential deal with Lyondell 7 BRF S.A. BRFS NYSE Food Producers – 1.46 Operation weak flesh – nasty meat scandal! – nevertheless check 8 Centrais Eletricas Brasileiras EBR NYSE Electricity – 0.4 Suspended privatization process – look into! 9 Comp. Paranaense de Energia-COPEL ELP NYSE Electricity 5.3 0.38 Cheap again – make long term earnings model. 10 Companhia Brasileira de Distribuica CBD NYSE Food &Drug Retailers 29.76 1.93 COMPARE ALL UTILITIES AGAIN WITH EARNINGS MODELS 11 Companhia Energetica de Minas Gerais-CEMIG CIG NYSE Electricity 6.38 0.56 COMPARE ALL UTILITIES AGAIN WITH EARNINGS MODELS 12 Companhia Siderurgica Nacional-CSN SID NYSE Indust.Metals&Mining 6.61 1.53 Volatile steel – take a look 13 Cosan Limited CZZ NYSE bioethanol, sugar and energy 10.17 1.16 sugar – complex stock – check 14 CPFL Energia CPL NYSE Electricity 13.81 2 COMPARE ALL UTILITIES AGAIN WITH EARNINGS MODELS 15 Embraer ERJ NYSE Aerospace & Defense 27.33 1.17 Check the long term outlook and new planes 16 Estre Ambiental ESTR NASDAQ Waste Management 55.41 81.49 Fresh IPO check – severely down 17 Fibria Celulose FBR NYSE Forestry & Paper 25.07 2.62 Loved it below $10 18 Gafisa GFA NYSE HouseGoods&HomeConst – 0.59 economy related, look 19 Gerdau GGB NYSE Indust.Metals&Mining 23.2 1 steel 20 Gol Linhas GOL NYSE Travel & Leisure – – look when comparing airlines 21 Itau Unibanco ITUB NYSE Banks 10.14 1.99 Itau Unibanco 22 Nexa Resources NEXA NYSE Mining 15.38 0.77 check it out from a mining perspectinve 23 Netshoes NETS NYSE Shoes – 0.76 Fresh IPO check – severely down 24 Oi OIBR NYSE Fixed Line Telecom. 0.08 0.09 probably wrong data on platforms 25 Petroleo Brasileiro-Petrobras PBR NYSE Oil & Gas Producers 21.79 0.74 oil is not my thing – plus corruption 🙂 26 SABESP SBS NYSE Gas,H20&Multiutility 6.47 0.87 utility check 27 Telefonica Brasil VIV NYSE Fixed Line Telecom. 16.556 1.11 not really a telecom lover 28 TIM Participacoes TSU NYSE Mobile Telecom. 22.88 1.68 not really a telecom lover 29 Ultrapar UGP NYSE Gas,H20&Multiutility 20.33 2.84 utility check 30 Vale VALE NYSE Indust.Metals&Mining 14.73 1.73 not related to Brazil

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Source: Compiled by author from various web sources

Check the cost of owning an OTCPK traded listing. I will also look at those for better specific sector analyses within Brazil.

Figure 10 Brazilian OTCPK investing opportunities

1 Advanced Digital Health Medicina Preventiva S.A. ADHMY HealthCareEquip.&Ser 2 AES Tiete Energia AESTY Electricity 3 Banco do Brasil BDORY Banks 4 BB Seguridade BBSEY Financial Services 5 Bombril-Cirio BMBPY HouseGoods&HomeConst 6 BR Malls Participacoes BRMSY Real Estate Inv&Serv 7 Cielo CIOXY Financial Services 8 Comp. Energetica de Sao Paulo-CESP CSQSY Electricity 9 Comp. Paranaense de Energia-COPEL ELPVY Electricity 10 CR2 Empreendimentos Imobiliarios CREIY Real Estate Inv&Serv 11 Cyrela Brazil Realty CYRBY Real Estate Inv&Serv 12 Cyrela Commercial Properties CYRLY Real Estate Inv&Serv 13 Dommo Energia DMMOY Oil & Gas Producers 14 Duke Energy DEIWY Electricity 15 Duke Energy – Pref DEIPY Electricity 16 ENEVA ENEVY Electricity 17 Engie Brasil Energia S.A. EGIEY Electricity 18 Equatorial Energia EQUEY Electron.&ElectricEq 19 Estacio Participacoes ECPCY Support Services 20 Hypera HYPMY Food Producers 21 Iochpe-Maxion Com IOCJY Automobiles & Parts 22 JBS JBSAY Food Producers 23 JSL JSLGY IndustrialTransport. 24 Klabin KLBAY General Industrials 25 Kroton Educacional S.A. KROTY Support Services 26 Light LGSXY Electricity 27 Localiza Rent A Car LZRFY Support Services 28 Lojas Renner LRENY General Retailers 29 Lupatech LUPAQ Industrial Engineer. 30 Marfrig Global Foods MRRTY Food Producers 31 Mills Estruturas e Servicos MILTY Construct.&Materials 32 Minerva MRVSY Food Producers 33 MMX Mineracao e Metalicos MMXMY Indust.Metals&Mining 34 MRV Engenharia MRVNY Real Estate Inv&Serv 35 OdontoPrev ODPVY HealthCareEquip.&Ser 36 OLEO E GAS PARTICIPACOES OGXPY Oil & Gas Producers 37 OSX Brasil OSXRY Oil & Gas Producers 38 Paulista CTPTY Electricity 39 PDG Realty PDGRY Real Estate Inv&Serv 40 Prumo Logistica PRMLY IndustrialTransport. 41 Qualicorp QULRY Nonlife Insurance 42 Raia Drogasil RADLY Pharma. & Biotech. 43 SLC Agricola SLCJY Support Services 44 Suzano Papel e Celulose SUZBY Forestry & Paper 45 Usiminas USNZY Indust.Metals&Mining 46 Usiminas USDMY Indust.Metals&Mining 47 Valid Solucoes e Servicos de Segura VSSPY Support Services 48 Via Varejo GBXPY General Retailers 49 Weg WEGZY Electron.&ElectricEq

Source: Compiled by author from various web sources

Both tables are downloadable on my Research Platform.

My next step is to readjust all my earnings models for the stocks I have covered in the past and to analyze the other stocks from a risk-reward perspective. There are 79 stocks to evaluate. If we find one, I’m happy; two would be a miracle.

Investment strategy

The investment strategy that has worked in the past was to find companies that will continue to grow business no matter what, find their average future earnings, and invest when the business return appears satisfying. Find investments where you can continue to invest if the stock drops to average down.

You can find the detailed analyses on my selected stock picks on my Research Platform.

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