Invest In These Beaten Down Brazil Stocks

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As riots erupted in Brazil over the last few weeks, the stocks trading on domestic exchanges have collapsed. In fact, the Brazil iShares Index (NYSEMKT: EWZ) fell from around $54 to $40 over a few weeks during June. Even worse, the index peaked out around $75 back in early 2011. Over two years later and the index still remain in a downtrend as US stocks soar.

Some interesting stocks include Gafisa (NYSE: GFA), GOL Linhas A (NYSE: GOL), and NII Holdings (NASDAQ: NIHD) as stocks beaten down in the last few years even as growth potential remains intact. See chart below for the one-month returns:

<img alt="" src="http://media.ycharts.com/charts/336661982f91b69291852538fb2e12a7.png" />

EWZ Total Return Price data by YCharts

The long term potential in Brazil has not changed. The country will host the World Cup in 2014 and the Summer Olympics in 2016. Investors now get the opportunity to buy the regions assets at much lower prices. All three of the stocks have plunged at least 11% in the last month on top of a weak few years.

Leading homebuilder

Gafisa is one of the leading homebuilders in Brazil, but the company has spent the last few years buried under mounds of debt. The recent net sale of 50% of the Alphaville subsidiary for $630 million will reduce the net debt to equity from 94% at the end of Q1 2013 to 53% after the completion of the transaction. The deal will allow Gafisa to focus on the Gafisa and Tenda brands while allowing Blackstone and partners to develop the Alphaville brand.

The company has a market cap of only $530M with revenue estimated at around $1.7 billion. The deal for Alphaville and general restructuring will keep a lid on revenues for now. If investors think Brazil and Gafisa can turnaround, the stock has huge potential, as it would double to reach the $5 levels of early 2013. In addition, the stock traded regularly around the $18 levels as recently as the end of 2010.

Top low-fare airline

 A leading low-cost and low-fare airline in Latin America has struggled with profits in the last couple of years. GOL has been reducing domestic service while increasing a focus on international flights. For May, domestic supply fell by 6.1% year over year primarily due to the discontinuation of Webjet’s operations. International supply grew by 39% over May 2012 as the company started daily flights to Santo Domingo, Miami, and Orlando.

The company reported a staggering loss of $2.50 in 2012 and analysts expect another loss in 2013. While analysts forecast a return to profitability in 2014, GOL has continuously missed earnings estimates making it difficult to trust any predictions. The stock trades at only 0.24 times the revenue base while fellow Latin America airlines Copa Holdings and LATAM Airlines trade at considerably higher multiples.

Wireless provider

NII Holdings owns valuable 3G licenses in prime countries such as Brazil and Mexico, yet the company was late to upgrade networks from 2G that operations have struggled considerably beginning in 2012. Now that the 3G networks are coming online, the stock has stabilized around $6, but any investors that bought the stock back over $40 in 2011 probably isn’t too happy.

Analysts expect massive losses in 2013 and 2014, which contributed greatly to the recent stock losses. NII Holdings has a subscriber base of 11.5 million and managed to add 152,000 net additions during Q1. The biggest issue though has been a substantial decline of $7 in ARPU year over year. With a market cap of only $1.2 billion, the stock offers intriguing value if it can stop the ARPU losses as it moves subscribers to 3G services.

Bottom line

While most Brazilian and even emerging market stocks in general have been crushed, the stocks of Gafisa, GOL, and NII Holdings face additional headwinds due to weak balance sheets. That combination has most domestic investors fleeing the stocks during this period of market weakness. A rebound in Brazil could send these stocks soaring if the trio doesn’t run into liquidity issues first.


Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus