BlackRock now says emerging markets have upside. No country may be happier to read that headline than Brazil. With the 2016 Olympics in the rear-view mirror, many people may want to forget about Brazil, but Brazil stocks shouldn’t be overlooked. Here’s why.
The iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) has been going through a tough time: the Brazilian President was impeached, the country’s economy nearly collapsed, there were protests in the streets and the Olympic venues themselves dealt with plenty of criticism, with corruption suspected.
But there remains great promise in the Brazilian economy. Brazil is blessed with impressive natural resources, and some legendary executive talent. Those names start with Jorge Paolo Lemann and his partners at 3G Capital.
Lemann is sometimes called the “Warren Buffett of Brazil” and 3G has often tied-up with Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) on big deals, like those for Burger King, which was then combined with Tim Horton’s Restaurant Brands International Inc (NYSE:QSR), Kraft Foods, Heinz and, now, Kraft-Heinz Co (NASDAQ:KHC).
The 3G partners, and their companies, are known for using “zero-based budgeting,” in which expenditures must be justified every year, leading to a fixation on profitable operations.
The 3G boys are all there is to Brazil. Abilio dos Santos Diniz, for instance, is worth $3.9 billion. Brazil’s land and its agriculture potential are legendary.
Lemann and other Brazilian business leaders, meanwhile, have had to be far more skillful than their American counterparts in order to deliver profit. Brazil still has many problems, starting with the ill-fated move into petroleum through Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR). Originally state-owned, and still 54% owned by the government, it was shown through an investigation called Lava Jato, or Car Wash, to be at the heart of a web of corruption that eventually led to the impeachment of President Dilma Rousseff and the arrest of her predecessor, Lula da Silva.
With the Olympics over, Rousseff’s trial can now proceed, and acting President Michel Temer is also under the threat of impeachment, but somehow Brazil goes on. After falling below 40,000 Real in January, the country’s Bovespa stock exchange average is up almost 50% on the year.
With that as a backdrop, here are three Brazil stocks to buy now.
Brazil Stocks to Buy Now: Ambev SA (ADR) (ABEV)
Ambev SA (ADR) (NYSE:ABEV) is the brewery at the heart of the 3G fortunes, the first company to succeed with its management theories and possibly the most dynamic brewer in the world. ABEV shares themselves are up 37% so far this year.
Just be aware, Ambev itself is not Anheuser Busch Inbev SA (ADR) (NYSE:BUD). ABEV represents only the brewer’s interests in South America, Central America and Canada; the latter acquired with Labatt’s.
Originally founded around a beer called Brahma, Ambev grew through acquisitions and the zero-based budgeting technique overseen by Carlos Alves de Brito. In 2002, it expanded beyond alcohol and became the primary bottler and distributor for PepsiCo, Inc. (NYSE:PEP) products in Brazil. It has since expanded that role into other South American countries, as well as the Dominican Republic.
Its biggest move came in 2004, when it combined with Interbrew, a Belgian company, to acquire Labatt’s and build an ownership structure that gives InBev 81% voting and 56% economic interest in Ambev.
AmBev suffered along with everyone else in Brazil during 2015, revenues and profits dropping almost 20% year-over-year, but operating cash flow remains strong.
Recently, analysts have been downgrading the stock, but for those who believe in the long-term proposition; this may represent a technical buying opportunity.
ABEV was trading at $6.09 on Aug. 22, down from a recent high of $6.27, but still well within its moving average of the last six months, which has taken it from a low of below $4 in February. The company reported earnings of 6 cents per share last month, beating consensus street estimates, and next reports earnings on Oct. 30. If you’re wrong on capital appreciation, know that you can get a dividend yielding 3.2% at ABEV’s current price.
How does this compare with BUD? This Brazil stock is better. Since the start of the year, ABEV shares are up 37%, while BUD stock is essentially flat. You don’t want a flat beer stock.
Brazil Stocks to Buy Now: BRF SA (BRFS)
Of all the ADRs addressed here, BRF SA (ADR) (NYSE:BRFS) has the longest history, its predecessor companies having been traded in New York since 2003. This gives its financial results a degree of transparency that is unusual among Brazil stocks.
BRFS is where legendary retailer Abilio dos Santos Diniz, a Portugeese immigrant, landed after selling his Grupo Par de Acucar in 2013. BRF is one of Acucar’s largest suppliers. Acucar made Diniz’ fortune, estimated at $3.9 billion.
Since leaving, Acucar Diniz has become the third-largest shareholder and a board member of Carrefour SA (OTCMKTS:CRERF), the French retailing giant. BRFS, or Brasil Foods, was formed by a 2009 merger between Sadia and Perdigao, which remain its primary brands. Sadia is best known for its meat-based products; meanwhile, Perdigao is known for its prepared foods.
Despite the fall of the Brazilian Real, the combination has sales of $10 billion per quarter, and its profitability reached 10% of sales in 2015. Operating cash flow exceeds $1 billion per year, and debt levels compare favorably with U.S. processors like Pilgrim’s Pride Corporation (NASDAQ:PPC) BRFS is a bet, not just on Brazil, but growth in the processed food culture of the entire global south.
As with other big Brazil stocks, shares in BRFS fell hard earlier this year, from a high near $20 to below $12, but since late May, shares have been on a steady rise, and over the last three months, they are up 33%.
Diniz is a proven winner, who is overseeing a solid management team … so are the boys from 3G. When playing in an unfamiliar business course, bet on the jockey rather than the horse.
Brazil Stocks to Buy Now: Brasilagro Cia Brasileira De Propriedades Agricolas (LND)
Brasilagro Cia Brasileira De Propriedades Agricolas (NYSE:LND), BrasilAgro for short, is a stock to play if you believe in the future of the country and its agriculture sector. The company buys land, prepares it for profitable use and then sells it when it proves its value.
LND came to the market in late 2012 and has since had a rocky ride. It topped $5 per share soon after launch, but traded below $3 per share early this year. And it isn’t the only company involved in the market. There are other investors, and this is not even the largest Brazilian company in the field — sugar producer Cozan Ltd (USA) (NYSE:CZZ) is larger
The difference is that while Cozan is a play on sugar and ethanol, LND is a play on the intrinsic value of land itself. If it can sustain its business model, and if Brazil’s government plays fair with it, BrasilAgro should do well. If ABEV is a bet on the 3G method, then LND should be seen as a bet on Andre Guillaumon, appointed CEO just this week. He had been Chief Operating Officer since 2007, after starting his career at Fertibras, a fertilizer company.
Mr. Andre, as he is known, succeeds Julio Toledo Piza, who led the company through the country’s currency troubles and productivity problems in both Brazil and Paraguay, which he blamed on drought. Piza dealt with the problems by selling land.
Investors were buying the story this year. From that low of below $3, the shares have been on a steady rise, and the sudden executive change at the top caused barely a hiccup, with LND rising over 4% on the day of the announcement to $3.85 per share. The company’s stellar operating margins and growth get the credit for that.
You are going to get volatility with most developing world stocks, often based on things that local management has little control over, like the local political situation. With Brazil stocks like these, you are betting on long-term trends, and on the ability of management to deal with constant change.
Personally, I would be reluctant, as a conservative investor, to put money to work on LND right now. I want to see all the fallout from the Piza resignation, and see how Guillaumon does on his own for a quarter or two before plunging in with both feet.
But the business model is sound, and it’s true that they’re not making any more land. If Guillaumon knows his stuff, LND could be a very good stock in which to ride Brazil’s next rise.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.