Despite their exciting potential, financial markets south of the U.S. border, particularly Brazil stocks, have largely remained a mixed bag opportunity for investors.
Although Brazil is the largest economy in Latin America, the tropical nation ranks 104 in infrastructure quality, according to the Global Competitiveness Report produced by the World Economic Forum. This is especially concerning given that this ranking is nearly on par with Argentina, a rival country that has been racked with severe political and fiscal crises.
On the other hand, there’s much to like about Brazil stocks and the potential performance of the underlying economy. Relative to western countries, Brazil has a very young demographic, with 43.7% of the population of working age between 25 to 54 years. In addition, young people, defined as those under 15 years of age, represent almost a quarter of the demographic.
Combined with the country’s vast natural resources, Brazil stocks are poised to ride a fundamental tailwind. Undoubtedly, foreign investments from international partners eager for expansion — East Asian countries come to mind — will continue to pour in. A recent recovery in the Brent Crude market, along with an explosive year-to-date surge of 25% in the BM&F Bovespa SA, should bode well for Brazil stocks over the coming years.
Here are three companies that should drive the sector higher.
Petroleo Brasileiro Petrobras SA (ADR) (PBR)
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Brazil’s state-run oil company pulled off a much needed break, beating Wall Street analysts’ fiscal expectations for the first quarter of 2015 in the face of an overall decline in crude oil prices. In response, investors poured in the cash, pushing up PBR stock 2% on the day of its earnings release.
On the other hand, Petrobras has had to deal with a very ugly corruption scandal that rocked PBR’s market value when the controversy was first made public. The issue, stemming from a deliberate overcharging of work for the purpose of transferring “profits” for political bribes, has led to the resignation of nearly all of PBR’s top executive officers. As a response, Petrobras was forced to cut investments by 13%.
Understandably, many investors may have apprehensions about PBR, fearing that it may only be a dead-cat bounce. However, the strength of the recent rally alone suggests something different. In fact, since PBR began trading in the American Depositary Receipt in August of 2000, there has never been a string of three-month performances as strong as the one it is on now.
Fortunately for potential buyers of PBR, the stock is still relatively undervalued against its historical trading distribution. At a time of writing price of $9.74, PBR currently occupies a price range that is least represented in terms of trading activity for times when the stock is below $20. In consideration of positive developments, namely, an uptick in crude oil prices, this implies that PBR will eventually move to higher price thresholds.
PBR is still traditionally considered a risky investment, with an off-the-chart beta of 2.3. However, for the risk-tolerant investor, Petrobras still has plenty of potential.
Vale SA (VALE)
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At issue was VALE’s weaker-than-expected earnings result for the first quarter of 2015, which was posted on the final day of April. Some of the bearishness was attributed to unpredictable weather-related occurrences, which negatively affected VALE’s production rate. In addition, earnings came in under Wall Street forecasts, due largely to reduced transportation volume and lower prices of iron ore.
Still, investors who drop VALE due to fundamental conditions in the commodities market — which is almost always in flux — may be passing up a contrarian opportunity. Despite the enormous price slide over the past two weeks, on a three-month average basis, VALE stock’s performance is quite high at 3.07%. Similar metrics in the past have yielded a 62.5% probability that over the next 90 days, VALE will return an average gain of 17%. The flip-side risk is a 37.5 probability that VALE will lose an average of nearly 13% of market value.
Fundamentally, there has been a noticeable uptick in precious and industrial metals, in particular, gold, silver, and copper. With newfound interest in commodities, along with the vast foreign capital interest towards Brazil stocks, look for VALE to make the most of its opportunities.
Companhia Siderurgica Nacional (ADR) (SID)
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The low-hanging fruit is of course that SID does not find itself embroiled in a major controversy like PBR. If anything, SID is the toast of the town, defying Wall Street’s bearish prognostication by reporting a net profit of $128.5 million for the first quarter of 2015.
According to a Reuters poll of analysts covering SID stock, the consensus estimate was a net loss of $271 million, making the company’s turnaround all the more impressive. SID and other Brazil stocks have languished under extremely weak commodity prices that have only just recently started showing signs of life. Further levering pain was weak domestic demand for commoditized products.
However, SID managed to pull off one of the biggest surprises of the year by simultaneously cutting costs and looking abroad for revenue support.
SID stock has responded in resounding fashion in the markets, achieving an average 18.34% performance over the past three months. While not quite a record-breaking run, it’s a remarkable accomplishment. Only nine other times since November of 1996 has SID achieved a three-month performance higher than 18%.
History also indicates that SID stock has more room to run. Hovering around $2.50, SID currently occupies a price range that sees comparatively few occurrences of trading activity. In theory, this implies that market forces will push the stock to a higher ($3 to $4 range) or lower ($1 to $2) price range.
Given the context of a commodities market seemingly poised for a recovery, chances are good that SID represents a lucrative, long-term investment.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
