Defensive Brazilian Stocks

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Brazil’s economy seems like the morning after Carnival: the night before, you were stunned by the millions of intoxicated people collectively throwing a party, but you wake up and the streets are eerily calm, clean, and empty, with people rushing to work in drab clothes. Brazil’s brief and unsustainable boom growth days are over and everyone still calmly shows up to work, but a parade of bad news and grumblings about inflation and low sales foreshadow a recession if trends continue. Second quarter growth clocked in at a mere .4%, inflation hit a multiyear high, investment is down, and demand from China, Brazil’s largest trading partner, keeps falling. Vale (NYSE: VALE), Brazil, and the world’s largest iron ore producer, hit new lows and other Brazilian stocks continue to stumble. In light of continuing problems, investors with Brazilian holdings should start thinking defensively.

What the Numbers Mean

Brazil has had a lackluster year. It seems that nearly every piece of economic data comes in below forecast, even after forecasters adjust their estimates downward. The government has implemented broad stimulus measures, including massive infrastructure spending, tax cuts, protectionist tariffs, and interest rate cuts, but the measures have had barely any visible impact. Brazil is in a much better place fiscally and macro-economically than most European countries, but economists and news outlets now discuss the possibility of recession.

Defensive Stocks

Markets move all over the place, and defensive stocks move less, offering a safer investment during downturns. Defensive stocks come from companies that offer staple products – such as electricity, food, medicines, and cheap clothes -- and thus count on stable earnings. Though there is some disagreement over what exactly counts as a defensive stock, most have betas of less than one, meaning that they move less than the market.  Brazil features a number of companies with classic defensive products and defensive fundamentals.

Companhia de Bebidas das Americas (NYSE: ABV) is one of the – if not the – highest quality stocks in Brazil. ABV sells Brazil’s most popular soft drinks and beer, as well as Argentina’s, Uruguay’s, and Bolivia’s, all countries where soft drinks or beer accompany nearly every meal. ABV sells seven of every ten beers in Brazil, and passed Vale to become the second-largest Brazilian company by market share this year. It has a small but growing dividend and a beta of 1.09, which puts it slightly out of strict defensive territory, but not for long, according to Bloomberg.

By product line, Brasil Foods (NYSE: BRFS) is the classic defensive stock, selling a diverse range of frozen and processed foods in Brazil. It commands considerable market share and brand recognition with the Sadia and Perdigão brands, and has smaller operations in over 100 other countries. Short of a catastrophic drop in family purchasing power, Brasil Foods’ earnings will not dip too far in a recession and it pays a small dividend. However, Brasil Foods was caught up in the post-financial crisis Brazil craze and its beta and P/E, at 1.36 and 44, are still high; its valuations could easily tumble.

The dedicated international investor can find some gems parsing through the consumer goods companies listed on Brazil’s national stock exchange, Ibovespa. While ABV and Brasil Foods are listed on the New York Stock Exchange and thus accessible to all U.S.-based investors, many good defensive companies are only listed in Brazil. These companies include Hering, the largest clothing retailer in Brazil and one that specializes in the basics, and Lojas Americanas, a discount department store that sells cheap home appliances, amongst other things. Tobacco company Souza Cruz could also be a good option for investors wishing to combine their vice, international, and defensive investments.

Seasoned observers rightly called Brazil’s 2010 7% growth a blip and not sustainable, but veterans and bubble investors alike got a few things right. In the last two decades, Brazil reversed past trends and emerged as macroeconomically healthy, with low debt, high reserves, and prudent monetary policy, and a more equal country with a strong and growing middle class. Mega- and large-cap companies that cut their teeth in the old, crisis-prone business environment thrive in this healthier one and will survive when the economy dips into recession. Investors who want to stay in Brazil can build a defensive portfolio by choosing from a host of healthy, well-run companies built to last in adverse conditions.

CallaMarie owns shares of Companhia Vale Ads. The Motley Fool has no positions in the stocks mentioned above. 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.

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