Investing in Brazil after the Fad
Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Brazilian craze of 2009 and 2010 drove Brazilian stocks to unrealistic and unsustainable valuations. Brazil’s economy and its individual companies have hit rocky terrain at home and abroad as demand from its largest trading partner, China, and domestic demand slow. Many investors have pulled out of the country in the past few months and Brazil’s main ETF, iShares MSCI Brazil Index (NYSEMKT: EWZ) is down nearly 27% since its high in March. After 10 straight weeks of growth estimate downgrades, Brazil is probably in for more lackluster economic data. On the upside, many well-run companies are now falling back into attractive valuation territory. We can’t predict the market, but this summer may be a good time to scoop up stellar Brazilian companies at good prices if you are in for the long haul.
You Don’t Hear this Often, But…
Two facts: no one can predict the market and most people don’t beat it by picking stocks. These facts lead Motley Fool analysts to the logical, profitable conclusion that most individual investors are best off buying low-cost index funds. In the case of Brazil, many investors have opted for iShares Brazil, hoping to get broad exposure to top Brazilian companies. However, the ETF is loaded with hard-hit bank stocks that have rising default rates and are struggling to find new revenue now that Brazil’s astronomic interest rates have come crashing down; four of iShares Brazil’s top ten holdings are financial stocks. Additionally, the fund includes telecom stocks TIM, Oi, and Telefonica, which the government just ordered to improve services and cut rates -- an excellent development for consumers, but investors may want to stay away in the short to medium term. Here, I look at the more promising individual stocks within the fund’s holdings.
Sifting for Gold
Vale (NYSE: VALE) and Petrobras (NYSE: PBR) are Brazil’s two natural resource mega-caps. They have both sunk to multi-year lows on falling prices, rising political concerns – they are both parastatals – and above all high levels of global uncertainty. Vale could fall much further on China’s problems and Petrobras keeps raising the costs and lowering the output estimates on its five-year investment plan. However, Vale has a P/E of 5.8 and a price-to-book ratio of 1.5, while Petrobras has a P/E of 6.9 and a price-to-book ratio of .69, and both pay small dividends. At those valuations, the market has priced in most of the possible risks that these companies face.
Companhia de Bebidas das Americas - AmBev (NYSE: ABV) is the crown jewel in Brazil's Bovespa index. The brewer has surpassed Vale as the second biggest company in the country. It has posted steady earnings and has impressive market share: 69% in Brazil and 41% to 97% in five other countries in the Americas. Not only is the company profitable in adverse as well as favorable market conditions, it’s also diversified across countries and beverage types, producing popular soft drinks as well as beers. Additionally, it markets brands to specific segments of national populations instead of producing one mass market lager like its competitors, giving it a strategic edge. Ambev is still pricey at a P/E of 26 and a price-to-book ratio of 7.6, but it’s come down from much higher valuations and is an excellent stock to put on your watchlist.
Brasil Foods (NYSE: BRFS) is another defensive staple to watch. The company operates a portfolio of widely recognized food brands in Brazil and is diversified across regions, distributing products to over 100 countries. It sells defensive staples like milk and flour, but its big business is meat and processed foods, divisions that stand to gain if Brazil’s poverty-reduction trend continues. With a P/E of 29 and no dividend, Brasil Foods is not cheap. However, it has fallen 30% since March and could become an attractive defensive play.
CallaMarie owns shares of Companhia Vale Ads and Petroleo Brasileiro S.A. (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.