Economies expand and contract. Currencies rise and fall. Governments come and go. Markets zig and zag. But proven investment principles don't change.
Yet the sad fact is that most investors have never learned them. They're trying to ace Trigonometry without having mastered Algebra 1." (Alexander Green, The Oxford Club)
One of the investment principles that hasn't changed is that well-run, resource-rich companies which have large amounts of cash can be purchased well below fair-market-value if you know when to buy.
Let's begin with two companies domiciled in Brazil. Brazil, like the rest of the "BRIC" nations, has experienced an economic slowdown and the government has intervened to help two important companies.
According to a May 24th Reuters report, Brazil eased rules for subsidized lending by state development bank BNDES to three of the country's biggest companies, including the two that we're about to discuss.
The question is whether the current market share prices for PBR and VALE are too low and about to move higher?
We know that the Brazilian Real is down over 6% against the U.S. dollar year-to-date. That should help make the export prices of Brazilian products cheaper for those purchasing in dollars.
There are reasons to believe that soon-coming economic events may lead to the dollar falling against currencies like the Real. That may be a good thing for companies who hold their reserves in that currency.
Crude oil prices have dropped over 10% from their 2012 highs and now hover near $90-a-barrel.
Oil traders and brokers are saying that oil might have found a new trading range between $85 and $95 a barrel, at least for the near term.
It appears that all this has been factored into the current price of PBR which cratered on May 24th at $18.97. Was that the low for 2012? Very possibly so.
Nicholas Timberlake, emerging market strategist of HSBC Global Asset Management in London, recently said that he expects stronger economic growth in Brazil than in other emerging markets.
According to a recent Forbes story the pessimism about Brazilian companies has been taken to an extreme that suggests a bottom.
Marcelo Salomon, an economist at Barclays Capital in New York, reported on Friday in a seven page note to clients that the pessimism on Brazilian growth is "excessive."
He's just one of many economists who believe that monetary and fiscal stimuli will push the economy up in the second half of the year.
"If, as we expect, growth starts to rise again in the second half, markets should renew their interest in Brazilian assets - global context permitting - though probably with a little less intensity than in the past," he said.
PBR is selling at less than 6 times forward earnings and about 45% below its 52-week high of $35.10.
The Price-to-Sales Ratio (PSR) is less than one. The lower the ratio the more attractive the investment value of a stock. A low PSR also is a historically reliable way to value growth stocks that have suffered a temporary fall from grace.
PBR has over a 17% operating margin and in the last twelve months generated revenues of $126 billion, a quarterly revenue growth increase (year-over-year) of 21%.
What helped to sink the stock included the amount of debt the company carries (almost $81 billion) and a 16% decline in quarterly earnings (year-over-year). Based on projections for the 2nd half of the year, it's possible that investors who buy at around $19 might enjoy a 20% gain by year's end.
VALE is another Brazilian powerhouse that has fallen out of favor temporarily with investors.
On May 23rd intra-day VALE's share price hit a 52-week low of $17.62. By week's end (May 25th) the share price had rebounded almost 4%.
Yet at $18.27, VALE is 46% below its 52-week high of $33.74.It has corrected the same amount as PBR, and as all smart buyers know, the time to buy great companies is when nobody seems to want them.
VALE generates enough cash (over $18 billion operating cash flow) to offer shareholders a generous 6.3% dividend. They make their money by exploration, production, and sales of basic metals in Brazil and internationally.
Vale is the second biggest mining company in the world and the largest in the Americas. They're the leading producer of iron ore and pellets and the second biggest nickel producer. Plus they're also among the largest producers of manganese and ferro-alloys. In addition, they find, produce, refine and sell copper, coal, potash, fertilizers, cobalt, platinum group metals and precious metals.
If that's not lucrative enough,they're also active in the logistics, energy and steel sectors.This is the Vale I encourage you to get to know better. Their multi-lingual website explains the range and reach of their operations.
My thesis is that the major economies of the world are soon going to launch a coordinated, global, aggressive monetary stimulus program.
The results will lead to a greater demand for VALE's products and services in the later half of this year. VALE is trading for less than 5 times projected forward earnings. With its apparently sustainable dividend, it "pays" to own shares at this price.
The investment principle based on the famous saying, "The best time to buy is when the blood is running in the street" may be here and now. Look for companies like PBR and VALE, study why they're so valuable and underpriced, and accumulate them with a 7-to-12 month time horizon. Then look forward to "selling high" after the market and everyone else catches on.
Knowing what to buy, when to buy and when to sell are the 3 most important investment principles to know and diligently follow.