StoneCo (NASDAQ:STNE) stock keeps dropping like a rock. It brings to mind the old David Einhorn quote: “What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”
StoneCo, incredibly enough, is now down 88% from its 52-week highs and is already down 33% year-to-date in 2022. The company faces a perfect storm. Payment companies in particular and “disruption” stocks in general are in freefall. Prominent growth funds such as Cathie Wood’s Ark Innovation (NYSEARCA:ARKK) own STNE stock and that’s a scarlet letter right now.
StoneCo also reported poor operating results in 2021. As the Brazilian economy dealt with inflation, it pushed through a massive series of rate hikes which have hit profitability for lending operations such as StoneCo’s. However, Brazil’s economy is back on the upswing thanks to surging commodity prices, and the iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ) has already surged 17% year-to-date in 2022. This will help StoneCo turn things around as well as the year progresses.
Why Brazil Has Underperformed In Recent Years
In previous articles on StoneCo, I’ve spoken at length about the company’s specific products, strengths, weaknesses, and outlook. So, instead of revisiting that territory, let’s instead put StoneCo’s position in broader context. Here’s why investors are too negative on Brazil for 2022, and how STNE stock will benefit as that perception shifts.
The Brazilian economy has had a terrible decade. In the mid-2010s, it had its worst economic downturn in decades. While the 2008 great financial crisis was the defining moment for developed countries, but much of Latin America actually fared worse between 2014 and the late 2010s.
As if that wasn’t bad enough, Latin American in general and Brazil in particular got whacked once again thanks to Covid-19. Keep in mind that Brazil is heavily reliant on commodity exports to fund its economy. Brazil is a global production leader in important categories such as iron ore, meat, soybeans, coffee, oil, and so on. Since the early 2010s, most of these have been in sharp decline as the prior China-led commodity boom turned into an extended bust.
That’s not all. Brazil also faced specific risks from a volatile political situation and an unorthodox central bank. Brazil’s bank ran some efforts to try to stabilize its real currency. When these failed to work as expected, it led to an accelerated decline in the value of its currency, along with rising inflation. On top of that, Brazilian politics have swung from the far left to the far right on occasion, creating a great deal of uncertainty for businesses trying to navigate the changing tides.
Fast forward to today, and inflation is again out of control, the political situation is volatile ahead of upcoming presidential elections, and sentiment is in the dumps. STNE stock, as you may have noticed, has lost more than 85% of its peak valuation. It’s been a total wipeout for Brazil.
When It Can’t Get Worse, It Tends to Get Better
The current mess starts with the political situation. Current president Jair Bolsonaro is dramatically unpopular following his heavy-handed style of leadership and his poor handling of Covid-19 compared to other Latin American neighbors. However, Bolsonaro’s primary opposition in the upcoming election is a socialist who would probably seek to enact many unfriendly toward business policies. Many analysts see a lose-lose situation.
Meanwhile, the Central Bank has been forced to hike interest rates hundreds of basis points in recent months to try to slow down a spiraling inflation problem. The situation seems grim. I’d argue things are near their darkest hour, however.
For one, Brazil should hold up better than many others amid the inflationary wave. It is a big producer of most of the commodities that are surging in price, after all. The prices of canola, soybeans, wheat, corn, and coffee have all doubled or more over the past two years, which is fantastic for an agricultural giant like Brazil. Indeed, it stands to see its currency strengthen as the price of things such as coffee and soy beans surges. As Brazil earns more export dollars, it should be able to stabilize its currency and start to bring inflation under control.
For another thing, the presidential election will bring a certainty to policy going forward. It’s well-known that both leading candidates have major flaws, to put it mildly. There’s little expectation for improvement regardless of who wins. That lack of optimism, however, is reflected in prices already. Meanwhile, just knowing who will be president next will give companies the confidence to prepare for more of the status quo, or a big swing in the leftward direction. Look for the election to be a classic sell the rumor, buy the news event.
The Bottom Line
StoneCo shares have continued to plunge in 2022. That’s even as Brazil turned the corner. The price of commodities such as soybeans, iron ore, and coffee are blasting off. This will put a ton more capital into Brazil. In turn, that will help slow inflation and shore up the country’s currency.
So far, investors have figured it out to a certain extent. They’re bidding up the Brazilian equities as an index. However, StoneCo, as a company, is still in the penalty box. That makes sense given its dour results in 2021 and the continued selling of payment stocks as a category. However, as the Brazilian economy is now revving up, it’s only a matter of time until StoneCo starts reporting stronger earnings and sentiment on the stock turns.
On the date of publication, Ian Bezek held a long position in STNE stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.