Banco Bradesco: Gateway to Brazilian Growth

It’s no secret that global growth continues to thrive and emerging markets continue to outperform. Investors are always looking for great growth stories, and Brazil is one of those stories. Dubbed by some as ‘China’s little brother’ in terms of growth, Brazil is definitely emerging as a sustained growth environment. Some might be asking, “why invest in Brazil when China is red hot?” And, actually, the fact that China is red hot IS the reason as to why you should turn to Brazil for growth. China’s growth is more-so tied to momentum now than actual growth itself. Sure, China is growing at a phenomenal rate, but it is simply not sustainable in the long-run. Brazil’s growth appears to be more sustainable. Not to mention, everybody and their dog is investing in China; after all, it’s the cool thing to do this year. On the other hand, Brazil is simply under-owned in terms of international investors. Brazil has simply taken a back seat to the ‘excitement’ of investing in China. And, undeservedly so. Comparing the two major ETFs tracking the various countries reveals their respective growth stories. In the past 6 months, the China ETF (FXI) is up 69%, while the Brazil EFT (EWZ) is up 44%. So, China comes slightly close to doubling Brazil in a 6 month period. Sure, China has the greater gains, but let me reiterate this point: the growth they are experiencing at this level is simply not sustainable. Brazil, on the other hand, despite seeing solid gains (44%) is growing at a steady, more sustainable pace. China is getting more ‘toppy’ every single day; Brazil is not. It’s definitely time to start investing in Brazil in order to tap into one of the next major growth stories that not enough investors are taking advantage of. Banco Bradesco (BBD) is one of the best ways to play Brazil.

With a weak US dollar, its almost common knowledge that foreign investments become increasingly attractive. And, what better way to increase returns on your weak dollar than investing in a foreign bank. Banco Bradesco (BBD) is a private Brazilian bank that services individuals, small businesses, and institutions. They provide typical banking operations as well as insurance plans. BBD is one of the main holdings in the Brazil ETF mentioned earlier (EWZ). BBD makes up 7% of EWZ and is the 5th largest holding in the ETF. Banco Bradesco is largely responsible for much of the gains in EWZ. Over the past year, BBD is up 75%.

To get a better idea of BBD’s investment potential, let’s examine the fundamentals. BBD has a market cap of %58.5 billion; clearly a large player in the industry. With a trailing PE of 19 and a forward PE of 13, BBD reflects solid valuation going forward. Its PEG ratio of 1.02 indicates that there is still room for growth and the quarterly year over year earnings growth of 43.6% echoes that. BBD has operating margins at a comfortable 21% and a return on equity of 24%. Banco Bradesco simply shows solid valuation.

Taking a look at analyst coverage reveals that not many people are paying attention to BBD (or many other Brazilian companies for that matter). There are currently 1 strong buy and 2 holds on BBD. This leaves plenty of room for other analysts to initiate coverage on BBD, providing a further catalyst for the stock. Expect this to happen as more analysts are turned onto the Brazil story as the China trade begins to slow. Eventually money will start trickling out of China, and Brazil should be a top recipient of those funds as investors continue to look for growth.

BBD also does not have a large institutional ownership presence, seeing as the Brazil growth story is really just beginning. Notable early investors and major shareholders include: BlackRock Group, Deutsche Bank, Morgan Stanley, and JP Morgan. Again, Brazil is simply under-owned here and we can expect institutional names to begin to build more positions in Brazil.

Next, let’s examine some technical indicators regarding BBD. In terms of short term indicators, there is an 80% buy consensus coming from positive indications such as the 20 Day Moving Average vs Price, the 20 - 50 Day MACD Oscillator, and the 20 day Bollinger Bands. Long term indicators point to a resounding 100% buy with very positive indications from the 100 Day Moving Average vs Price, and the 50 - 100 Day MACD Oscillator. BBD’s 1 year chart is a fantastic uptrend, plain and simple.

Lastly, checking out the put/call ratio gives us an indication of what the options market thinks about BBD’s future. A put/call ratio of 0.5 or less is a bullish signal as it means the bullish investors clearly outnumber the bearish ones. Banco Bradesco’s put/call ratio comes in at an eye-popping 0.04. This means there are nearly 25 times as many bullish investors than there are bearish ones. Clearly BBD’s future looks bright.

As Chinese stocks continue to soar vertically every day, one can only wonder if a short-term top is near. In the arena of international growth stories, Brazil seemingly has less downside risk and more upside potential as it grows at a slightly robust, yet steady pace. With investing in China comes a fear of a top. With investing in Brazil, there is no such fear at these levels. As the US Dollar continues to weaken (pending further Fed rate cuts), international plays become all the more attractive. Foreign banks offer safe exposure to the financial sector and access to
international emerging markets. Unaffected by the United States sub-prime mess, foreign banks like Banco Bradesco (BBD) continue to flourish in a period of global growth and provide your portfolio with diversification in more ways than one.

Buy: BBD, Target Price: $40, Time frame: 1 year

Disclosure: Long EWZ at time of publication