Hedge Funds Still Like These Brazilian Stocks

The economic and political turmoil that Brazil has witnessed in the last few quarters has been extremely frightening. Apart from facing its worst recession in a century and a ballooning budget deficit following the downgrade of its credit rating to junk in 2015, the country is also grappling with the loss of its image among the global investment community due to the numerous corruption scandals. The impeachment of former President Dilma Rousseff last month has brought more confusion to the table as investors are not sure whether the new government can tackle the economic crisis that the country finds itself in. However, amidst all this chaos the Brazilian equity markets has performed extremely well this year.

The IBOVESPA, which is an index of about 50 stocks that are traded on the São Paulo Stock, Mercantile & Futures Exchange, is up by over 35% year-to-date and is the best performing index so far this year among major global indices. Considering the outperformance of Brazilian equities this year, we at Insider Monkey decided to compile a list of U.S.-listed Brazilian stocks based on their popularity at the end of second quarter among hedge funds covered by us. In this post, we will take a look at the five stocks that topped our list and will analyze the returns they have generated of late.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points in our backtests that covered the period between 1999 and 2012 (see the details here).

#5 Cosan Ltd (USA) (NYSE:CZZ)

– Hedge Funds with Long Positions (as of June 30): 16

– Value of Hedge Funds’ Holdings (as of June 30): $150.78 Million

First up on our list is Cosan Ltd (USA) (NYSE:CZZ), which was held by 16 hedge funds covered in our database on June 30, down by four quarter-over-quarter, though the aggregate value of their holdings increased by $40 million during the second quarter. Shares of the transportation logistics have nearly doubled this year, but are still trading down by over 65% from the peak they made in early-2013. Analysts who track the stock think that, trading at a trailing P/E of 10.12 and a price-to-book multiple of only 0.99, it can see further upside in the coming months. Cosan Ltd (USA) (NYSE:CZZ) currently pays a yearly dividend of $0.09 per share, which translates into an annual dividend yield of 1.30%.

#4 Ambev SA (ADR) (NYSE:ABEV)

– Hedge Funds with Long Positions (as of June 30): 21

– Value of Hedge Funds’ Holdings (as of June 30): $490.28 Million

The number of hedge funds covered by us which were long position Ambev SA (ADR) (NYSE:ABEV) declined by three during the second quarter, however, the aggregate value of their positions increased by $75.08 million. Ambev SA (ADR) (NYSE:ABEV)’s stock has been on a consistent uptrend since the beginning of this year and is currently trading up by 36.32% year-to-date. Since the brewing major has performed well even during dismal times and sports a healthy balance sheet, according to some analysts, its ADR represents good value at current levels for investors with a long-term horizon. However, analysts at Morgan Stanley don’t share the same opinion on the stock. On August 18, they downgraded the stock to ‘Equal-Weight’ from ‘Overweight’, but raised their price target to $6.40 from $6.00, which represents a potential upside of only 5% from its current trading price.

#3 Itau Unibanco Holding SA (ADR) (NYSE:ITUB)

– Hedge Funds with Long Positions (as of June 30): 22

– Value of Hedge Funds’ Holdings (as of June 30): $517.36 Million

Itau Unibanco Holding SA (ADR) (NYSE:ITUB) is the only stock covered in this list that saw its ownership among hedge funds covered by us increase during the second quarter, by seven. The aggregate value of hedge funds’ holdings in the company also saw a major increase of over 125% during that time. Funds that initiated a stake in the company during the second quarter included Orlando Muyshondt‘s Tyrian Investments and Howard Marks‘ Oaktree Capital Management. Though Itau Unibanco Holding SA (ADR) (NYSE:ITUB)’s stock has appreciated by 67.43% so far in 2016, a lot of analysts think that this rally has been fuelled more by optimism and less by a change in fundamentals. According to them an external shock to the Brazilian banking system that can originate from a collapsing economy and will be driven by a fall in commodity prices can be detrimental for Itau Unibanco Holding SA’s stock. On August 16, analysts at JPMorgan Chase & Co. reiterated their ‘Overweight’ rating on the stock and lowered their price target on it to $9 from $11, which represents a downside of 18.18% from its current trading price.

#2 Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)

– Hedge Funds with Long Positions (as of June 30): 23

– Value of Hedge Funds’ Holdings (as of June 30): $537.55 Million

Moving on, the ownership of Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) among the hedge funds in our database remained unchanged during the second quarter, but the aggregate value of their holdings in the company during the same period swelled by almost 140%. While one can argue that the increase in the aggregate value of holdings of hedge funds during the second quarter was largely a result of the 130% gain that the stock has seen so far this year, the fact is that Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)’s stock appreciated by only 22% during the April-June period.  Most of those gains that the stock has seen this year have come in the first and the current quarter. Hence, it’s quite possible that the hedge funds like John Horseman‘s Horseman Capital Management that initiated a stake in Petroleo Brasileiro SA Petrobras (ADR) during the second quarter, would be sitting on large gains right now. Earlier this month, the company revealed that 11,704 of its employees have accepted voluntary layoffs as part of its voluntary dismissal program, which is intended to help cut costs and reduce debt. On September 8,  Petroleo Brasileiro SA Petrobras announced that it had concluded negotiations to sell its natural gas pipeline Nova Transportadora do Sudeste to a group of investors led by Brookfield Asset Management.

#1 Vale SA (ADR) (NYSE:VALE)

– Hedge Funds with Long Positions (as of June 30): 24

– Value of Hedge Funds’ Holdings (as of June 30): $255.42 Million

Vale SA (ADR) (NYSE:VALE) was the most popular Brazialian stock among investors tracked by Insider Monkey at the end of June. During the second quarter, the ownership of the company among funds we cover declined by two, but the aggregate value of their holdings jumped by $40.5 million. The mining giant has lost almost 80% of its market capitalization in the last five years. However, its stock is currently trading up by 65.14% year-to-date. For its fiscal 2016 second quarter, the company reported EPS of $0.21 on revenue of $6.63 billion, beating analysts’ estimates of EPS of $0.18 on revenue of $6.49 billion. On September 12, analysts at JPMorgan Chase & Co. issued a note in which they upgraded the stock to ‘Overweight’ from ‘Neutral’, citing stability in iron prices, which the firm expects will trade in between $50 and $60 per ton through 2017. In their note, the analysts also mentioned that they now expect Vale SA to post positive free cash flow in 2017 and beyond versus their earlier prediction of negative cash flow in 2017.

Disclosure: None