New Risk-Taking Is Good for Gafisa

It has been very difficult to stick with any mid-cap or smaller international names as they have been completely bludgeoned. Emerging market stocks seem to all trade in one big horde - and in a country like Brazil when commodities are in favor, any stock in the country moves with it. It makes little sense to me, but that is the market.

Gafisa (GFA) is a Brazilian homebuilder we've owned in the past, but at much higher prices. Thankfully, we escaped in September 2008 without much damage, but it's been a free fall the past year. I'm still a bit flabbergasted at just how far this name fell. It is profitable and earnings well over $1 EPS...


Lately, the chart has been firming up as risk-taking has begun to return to the market. That said, if fear returns, this type of stock can drop 30% in 3 days, so one has to tread with caution. But we can see there appears finally to be a floor in the $7s and it made higher lows during the February swoon than the Oct-Dec 2008 swoon. A good sign.


Sam Zell has a large stake in Gafisa via Equity International [Oct 22, 2008: Sam Zell Increases Stake to Gafisa to 18.7%] which he recently has increased even further; in fact, he is buying up a lot of stakes in the Brazilian homebuilder market via different entities. His continued holding in Gafisa is impressive considering its drop some 80% the past year on him. Zell has had one rough year [Dec 8, 2008: Tribune Files for Bankruptcy], but generally is considered an extremely shrewd man. For my purposes, I want to find some exposure in stocks which still have growth and whose charts are decent; we've culled a lot of non-performing long positions of late, so I'm looking for new candidates - our old portfolio is a good place to begin. Mercadolibre (MELI) is another candidate and former holding which has really perked up of late.

But back to Gafisa, I am beginning with a 1.2% stake in the $9.40s area, and I'd like to see the stock hold the $9.20s level. I'll add if I see strength there. If we break through, we have to wait for a more stable period.

[Aug 17, 2008: Gafisa Earnings]
[Nov 19, 2007: Initiated a Position in Gafisa - Brazilian Homebuilder]

Per the Wall Street Journal

• Real estate tycoon Sam Zell, trying to restore his stature as an astute investor after his disastrous buyout of Tribune Co., has surfaced as an unlikely player in a controversy in Brazil over affordable housing.
• Mr. Zell has been focusing much of his time on his global real-estate investments since the bankruptcy filing by Tribune late last year. His real-estate private-equity firm, Equity International Properties, is trying to capitalize on what many analysts say is a pent-up demand for housing in Brazil through its 19% stake in homebuilder Gafisa SA.
• That's put Mr. Zell in the middle of a debate in Brazil over a $15 billion program launched by the government of President Luiz Inacio Lula da Silva to help build one million new houses for low-income families. The plan includes loan subsidies to expand the country's tiny mortgage sector, which could stimulate demand for affordable houses like the ones built by Gafisa's Construtora Tenda SA. The government also is providing more than $1 billion in low-interest financing to homebuilders.
• Some Brazilian critics say the government has been working too closely with the private sector, and that social concerns haven't been fully addressed. They say the plan will increase urban sprawl without doing anything about as many as six million vacant homes across Brazil.
• Even Mr. Zell is skeptical. "I have learned from being around for a really long time that I won't believe anything governments say until they actually do it," he said in an interview.
• Over the years, Mr. Zell has been much more successful in real estate. He made a fortune buying distressed assets in the early 1990s, earning a nickname as a "grave dancer." In 2007 he sold his U.S. office building company, Equity Office Properties Trust, to Blackstone Group LP in a $39 billion transaction that came to mark the peak of the commercial property boom.
• Since then, many of his real estate holdings have suffered along with the rest of the industry. Capital Trust, which invests in commercial real estate loans, has seen its shares tumble to less than $2. Shares of Equity Residential, which owns or invests in more than 500 apartment properties around the U.S., have lost more than half their value in a year.
• Equity Lifestyle Properties, which runs manufactured-home communities, has held up a bit better because of what some analysts say is a relatively healthy balance sheet and a business model that could hold up in a recession. Mr. Zell's net worth was cut in half to $3 billion in the past year, according to Forbes.
• Unlike his real estate investment trusts, Equity International is privately held. It has invested about $1.5 billion around the world, from warehouses in China to retirement villages in New Zealand. Half of the company's invested capital and 70% of its investments' market value is in Brazil, a nation that appealed to Mr. Zell because of its size and relative stability.
• Gary Garrabrant, chief executive of Equity International, said some investments in China have proved challenging in part because of austerity measures by the government there.
• Mr. Zell said: "We're doing OK, we're not doing great. ...Some of our positions have been marked down as you would expect. But we're very comfortable because we really understand the businesses and where they're going."
• Mr. Zell said in Brazil, Mexico, and China there's "enormous pent-up demand for low-income housing." (don't forget the US, Sam!)
• In Brazil, Equity International has staked the most on Gafisa. The fund first bought into the company in 2005, paying roughly $50 million for a 30% stake. Equity International bought another $50 million in Gafisa shares in October, after the company's stock price had fallen to about half of its $50 peak. It's now trading below $10 on the New York Stock Exchange.
• Equity International has been active behind the scenes. Last year it pushed Gafisa to acquire an affordable homebuilder, eventually settling on Construtora Tenda SA. And more recently, the American company has been counseling Gafisa Chief Executive Wilson Amaral on what arguments to make as he urges the country's political leaders to expand assistance to the housing industry.

Disclosure:Long Gafisa in fund; no personal position