Brazil: Let the Feeding Frenzy Begin 20 comments
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...but be smart and take
the short-term profits.
There will be plenty of time to position yourself for the long term once the S&P investment grade upgrade starts to make a real impact on the Brazilian economy. However the chances of hot money sloshing in tomorrow are pretty high, with articles such as this one linked here predicting 25% index gains for 2008 fuelling the sheep money fire (remember the ADRs traded in New York yesterday, but the Brazilian markets were closed for May Day).
So where are the trades? Let's assume you don't have access to the Brazilian market directly and want to play the ADR stocks; here are a few to consider:
ERJ: the Embraer ADR. This one has lagged the market somewhat this year, despite being a great Brazilian success story and having an order book stacked up in the billions of dollars. Expansions in workforce have started getting the planes out to customers more quickly recently. It's something of a national jewel, this one.
VIV: Mobile phone play Vivo jumped 6.4% yesterday, but there's plenty more where that came from. Sector consolidation in Brazil is making the competition less cut-throat., and VIV should begin to perform well on its bottom line. As the North loves a growth stock in a growth sector, I expect Vivo to be a hot money target.
CIG: Cemig is a Brazilian energy play that popped 2% yesterday, but it still under its 52 wk highs. At $21 now, if this breaks $23 it'll be off to the races. [CORRECTED]
SBS: Sao Paolo water company SBS is sitting here at a great, great price. Dividend yield is attractive, and I have its forward PE pegged at 8X presently. That could easily expand to 12X now that investment grade is here. SBS is probably my top Brazil pick from here, but at the same time may not get the first wave of hot money washing over it.
ITU: Banco Itau got a big pop on strong volume yesterday on the investment grade news, and will be one of the first in line to receive hot money when Sao Paolo opens tomorrow. It may be close to fully priced on fundamentals right now, but there may well be a lack of logic in Brazilian trading over the next couple of sessions. Trade it on a momentum basis.
GGB: Gerdau Steel has resisted all downgrades on its climb to its current all time high. With a PE of 11.5X right now, there's more in the tank now that Brazil is "officially a serious country"*. Again, don't be afraid to take a short term profit on GGB, but be thinking about a longer term position afterwards.
So there are six ways to play the investment grade party. You'll notice that PBR and RIO aren't on the list. This because they're already 'world class' investment risks and won't be first in line to get "the pop" from this news. Another way to play Brazil is the useful ETF play, EWZ. Finally, the Brazilian bonds may have tightened considerably these last 48 hours, but with the high interest now on offer to more institutional money, they will still have plenty of buyers on Friday. Another good option to consider.
I hope this little overview helps in its own small way. However I'm sure you'll need to do more DD on any or all of these before making a good investment decision.
Disclosure: Long SBS, VIV
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This article has 20 comments:
I am a professional investor- and began to invest in brazil three years ago. My wife is Brazilian and I have spent much time in the country.
For anyone interested in brazilian ADRS (brazilian stocks traded in the US- the full ADR list is on stocksabroad.com )
The one thing i must disagree with is 'short term profits'- these are buy and hold stocks. Brazil has the second best performing stock market during the past 6 months (behind the US)- and is best poised to see a significant run-up due to the fact that SandP has upgraded the country's debt to 'investment grade' as well as many of its blue chip cos.
I suggest investors take a strong position - also US investors CAN trade Brazilian stocks traded on the Bovespa but not the us (non-adrs)- if you go to bovespa.com.br - see the 'international investors' section for instructions. This option makes sense if you have over 100k to work with- otherwise you are best just buying the adrs......
Agreed on the long term hold. The "trade" comment is only for the very short term, as the rush to get in will cause a short term over-valuation of some stocks. So the advice is to take a short term profit, and then buy in on weakness and hold (particularly stocks like SBS, that will benefit anyone with the necessary patience).
Brazil long term? Absolutely! But the short term trade is also worthy of mention.
Otto
that some airlines are switching to turoprop planes instead of jets
on regional routes to save on fuel costs. This could reduce Embraer's regional jet sales.
I particularly like EWZ because it fits very nicely with my MAD investment philosophy, Multi-Asset Distribution.
im an analyst also or could be.
how ca i write here
To Mr. Rock, thanks for the head's up on SBS.
To commenter V. Winner, thanks for the reference to stocksabroad.com, it looks like an interesting site.
The fighter should be something like Su-30MKI or even the Sukhoi PAK-FA
I do recognize that there are short term profits to be made (and I must admit that I have traded a few positions myself).
Fitch just upgraded Gafisa today and their earnings were spectacular-
I think Brazil is a great play- not only many of the ADRs but for those of you that wish to trade Bovespa- only shares- there is an 'international investor' section at: bovespa.com.br
One interesting sidenote from this weekend's Berkshire Hathaway meeting- the Brazilian Real is Warren's ONLY foriegn currency holding........
By Paulo Winterstein and William Freebairn
Enlarge Image/Details
May 6 (Bloomberg) -- Most Brazilian stocks on the Bovespa index fell, led by banks and homebuilders, after a three-day rally made the stocks the most expensive since September 2004.
Banco Bradesco SA, the nation's biggest non-government bank by assets, paced declines among lenders after they had their biggest three-day rally in almost six years. Merrill Lynch & Co. said Rossi Residencial SA, the third-largest homebuilder, was expensive, sending real estate stocks lower. TimParticipacoes SA, Brazil's second-biggest mobile-phone carrier, plunged the most since January after saying revenue will grow 9 percent this year, not 12 percent as predicted in March.
The Bovespa Index of the most-traded stocks on the Sao Paulo exchange added 20.39 points, or less than 0.1 percent, to 70,195.27 as a late-day rally in commodities, led by state- controlled oil company Petroleo Brasileiro SA, pushed the index to positive territory in the last minutes of trading.
Of the index's 66 stocks, 39 fell and 26 rose, while 1 was unchanged. The index had jumped 10 percent since Brazil received an investment grade credit rating for the first time from Standard & Poor's on April 30.
``There was a bit of euphoria,'' said Augusto Lange, who helps manage $850 million at Neo Gestao de Recursos in Sao Paulo. ``You got the investment grade at a time Brazil is raising interest rates, so for companies that would benefit most, the effect will be moderate in the short-term.''
The Bovespa index traded at 17 times trailing earnings yesterday, the highest since September 2004, when the index's price-earnings ratio was at 19. Mexico's Bolsa rose 0.9 percent and Chile's Ipsa fell 0.7 percent.
Bradesco Gains
Bradesco dropped 3 percent to 39.09 reais. Banco Itau Holding Financeira SA, the second-biggest non-state bank, slid 4.3 percent to 47.61 reais after reporting first-quarter profit rose 7.4 percent to 2.04 billion reais. Itau was cut to ``hold'' from ``buy'' by Deutsche Bank AG analyst Mario Pierry, citing a recent stock rally and ``limited'' earnings growth.
``If Itau had come above expectations, maybe it would counter this general fall in banks, but as it came within expectations, earnings don't affect the market,'' said Aloisio Lemos at Agora Corretora in Rio de Janeiro.
Companies in the MSCI Brazil financials index yesterday traded at their most expensive levels since January.
Tim, which lost 8.1 percent to 5.24 reais and led declines on the index, said growth in handset sales slowed. Earnings before interest, tax, depreciation and amortization fell 19 percent to 535.4 million reais ($322.5 million).
Property Stocks Fall
Rossi led declines in real estate stocks, falling 5.1 percent to 18.82 reais. Merrill analyst Carlos Peyrelongue cut the company to ``neutral'' from ``buy,'' citing its 30 percent gain in three days and the possibility higher interest rates will hurt profit.
Cyrela Brazil Realty SA Empreendimentos e Participacoes, the biggest homebuilder, lost 3.6 percent to 27.95 reais after Deutsche Bank AG analyst Dan McGoey cut the stock to ``hold.'' Gafisa SA, the second-biggest homebuilder, was also cut to ``hold'' due to its ``sharp price rally.'' Gafisa fell 5.1 percent to 35.50.
Petrobras non-voting shares, the most heavily weighted stock on the index, gained 2.6 percent to a record 45 reais as oil traded at an all-time high in New York.
Steel companies gained, led by Usinas Siderurgicas de Minas Gerais SA, Brazil's second-largest steelmaker, after Deutsche Bank said the company will be able to raise prices to offset costs. Usiminas gained 2.7 percent to 82.75 reais. Gerdau SA, Latin America's biggest steelmaker, rose 1.3 percent to 70.81 reais while Cia. Siderurgica Nacional SA advanced 2.9 percent to 74.21 reais.
Mexico Gains
In Mexico, the Bolsa index rose for the fourth day as America Movil SAB gained after reaching an agreement to renew its license to operate in Ecuador.
``The market had accepted the fact last week that the license would not be renewed,'' said Arturo Espinosa, head of research services at Banco Santander SA's Mexico unit. ``It's less uncertainty for them.''
America Movil, the most heavily weighted stock on the Bolsa, climbed 0.7 percent to 30.89 pesos, and accounted for almost a fourth of the Bolsa index's point gain.
Argentina's Merval gained 1 percent while Peru's Lima General was little changed. The MSCI Latin America Index rose 0.8 percent to a record.
To contact the reporters on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg... William Freebairn in Mexico City at wfreebairn@bloomberg.n...
Last Updated: May 6, 2008 16:55 EDT
PBR split. Trading at ~$64. Would you say this is a buy?
Goodluck.