The brothers stuck to the family business, through one crisis after another. Joesley Batista, in particular, showed a talent for business. And the family firm grew and grew and grew…

That family firm is today JBS-Friboi, the largest meatpacking company in the world. JBS had sales of $29 billion in 2009 — up nearly 2,000% from where it was in 2004. It is Brazil’s second-largest private company, behind only Vale SA. And most of its sales come from outside of Brazil.

The three brothers still run the show, though public investors hold 49% of the stock. And Joesley Batista, “the Meat King,” is its president. He is a billionaire now, one of the most successful of Brazil’s entrepreneurs.

Batista, though, had an assist from Brazil’s development bank, BNDES, which has helped bankroll the company’s acquisitions. BNDES exists to promote the international expansion of Brazilian companies. Taxes fund its efforts. In 2007, BNDES bought 13% of JBS to help it acquire Swift, which was America’s third-largest pork and beef processor.

And in September 2009, JBS bought a 64% stake in another American icon, pulling it out of bankruptcy. The Economist commented on the deal:

This will be a big test for the Batista brothers and for Brazil’s tropical brand of capitalism, which mixes family control with traded stock, and finance from state-run banks with foreign acquisitions. Brazilian companies in other industries are watching how JBS gets on and plotting similar moves themselves.

It is a cocktail that we see more of these days, this mixture of government support and private enterprise, but that is a philosophical topic to explore another day.

With this deal, JBS became the largest meat processor in the world, surpassing Tyson Foods. The Brazilians, by the way, dominate the global meat trade. It’s not just that Brazil is raising the animals and growing crops. More and more, Brazilians are getting into the processing business, which brings greater profits. As Larry Rohter writes in his book Brazil on the Rise:

Three of the 10 largest global producers of animal protein are now Brazilian-controlled companies. The expectation is that Brazil’s role will grow even larger over the decade to come as its production of beef, chicken and pork rises.

This too is an interesting commentary on Brazil and its evolving role in food production. Batista is the poster boy of these big ambitions. He wants JBS to become a global power in milk and dairy products, too. This is another area where Brazilian firms plan to expand rapidly in the next several years.

But what interests us here is this: JBS paid $800 million for its 64% stake of a bankrupt American company. That implies an equity value of $1.25 billion, or about $5.80 per share. The total value of the deal was $2.8 billion, including debt.

Despite a large run-up earlier this year, increased market volatility has pushed shares back down to historic levels.

Today, this stock is trading near penny stock prices. So we have a chance to bet with the Batistas here as their junior partner in the deal — at prices very close to what they paid for it out of bankruptcy.

And it’s likely that the Batistas eventually merge this company into JBS USA, their U.S.-subsidiary, sometime before January 2012, which would likely be good for the share price. I think that a 100% upside could be in store for shareholders… If they get in while this stock remains cheap.

Sincerely,
Chris Mayer
Penny Sleuth

October 26, 2010

The Small-Cap Meat Stock with a 100% Upside was originally featured in the Penny Sleuth.

For many, it’s an ugly city, but I loved it right away. While gloom and doom hover over the economies of the U.S. and Europe, it is impossible to maintain a sense of pessimism in São Paulo — or Brazil, for that matter. It’s a showcase for the kind of changes sweeping over the emerging markets.

São Paulo had a humble beginning. Jesuits founded it on the banks of the little Tietê River in the 16th century. It was for hundreds of years an insignificant settlement. Even as late as the 1870s, it had only 26,000 inhabitants, cobbled around narrow streets.

But it would go on to put up perhaps the greatest population growth curve of any major city in human experience (as the Fernand Braudel Institute maintains). A great coffee boom in the 19th century was the kindle that sparked São Paulo’s growth. By the 1890s, the population tripled. And today, there are 20 million people in greater São Paulo.

The state of São Paulo has 45 million people and makes up nearly a third of Brazil’s economic output. Half of the country’s tax base is here. If it were its own economy, the state of São Paulo would be the second largest in South America — behind only Brazil and ahead of Argentina and Colombia. It is also home to Brazil’s stock market, the fourth largest in the world by market cap.

São Paulo did not grow up slowly around a center, as did the cities of Europe. Rather, it grew hastily and in an improvised manner. You can see the consequences of that process today. Traffic is horrendous. It can take more than an hour to move only a handful of blocks. The subway system is not up to the task of serving the entire city. And record car sales overwhelm the construction of new roads.

There is also an acute housing shortage, which is where an interesting investment opportunity lies. There are a lot of ways to show the data on housing. One common way to measure housing shortages is to look at how many families have three people per bedroom. This measure shows about 13% of families live in substandard housing. Expressed as a number of units, Brazil needs nearly 6 million new homes.

That’s really not surprising when you think of the swelling ranks of the middle class. Millions of people have become consumers in the last decade. Housing has not yet caught up with that demand. By some estimates, Brazil needs to build about 1.6 million homes every year just to keep up with new families entering the market.

In São Paulo, you can also see the shortage in the price of homes. New construction often takes three years. People now taking delivery for housing units bought three years ago find that the value of their dwelling doubled.

All that frothiness has some people worried about a housing bubble. Brazil’s mortgage market, too, is in hyper-growth mode. Take a look at the total loans to homebuilders and buyers.

It looks impressive, but the starting base was very low. Brazil’s home lending market is still only a fraction of that found in other Latin American countries, such as Mexico or Chile. Brazilians also have much more equity invested in their homes. Typically, loan-to-value is 70–75%.

Eventually, supply will catch up with demand, and maybe even exceed it. Then you’ll have a correction. But that day seems years away.

Sincerely,
Chris Mayer
Penny Sleuth

October 11, 2010

How to Profit from São Paulo’s Housing Boom was originally featured in the Penny Sleuth.

I can say the caipirinha — Brazil’s national drink — is a potent cocktail. Brazilian meats are very salty. Brazilian desserts are very sweet. This taste for the extremes of the flavor spectrum extends to Brazil’s monetary brand, as well.

Today, the Brazilian real is strong (and the dollar is weak). The real is now at a 10–month high against the U.S. dollar (having risen 40% from its lows in early 2009). This prompted the Brazilian finance minister to threaten weakening the real. You’ve probably heard of his comment about a “currency war.”

What he fears is that the strong real will hurt Brazil’s export goods by making Brazilian goods more expensive, hence weakening Brazilian economy. It is a tired line of reasoning. This idea that a country gets rich by destroying the value of its currency is a weed that won’t go away no matter how many times you pull it from the soil.

What’s curious about this is that you’d think a Brazilian would appreciate the dangers of weakening a currency more than most. Brazil has had a habit of blowing up its currency over the last 60 years.

From 1942 to the present, Brazil went through eight different currencies:

• Mil Reis, 1833-1942
• Cruzeiro, 1942-1967
• Cruzeiro Novo, 1967-1986
• Cruzado, 1986-1989
• Cruzado Novo, 1989-1990
• Cruzeiro, 1990-1993
• Cruzeiro Real, 1993-1994
• Real, from 1994.

The present-day real is but a teenager, a mere youth sprung from a bad family. Yet it is among the world’s strongest currencies today, bolstered by the commodity wealth and strong growth rate of Brazil’s economy.

Say what you will about the U.S. dollar, which has been a poor currency as far as retaining its purchasing power over time, but it’s never gotten so bad that we had start over — at least not yet. Brazil’s experience makes the dollar look like a gold standard. It was not that long ago that Brazil’s inflation rate hit 2,700%. It happened in one 12-month period from 1989-1990.

Even as late as 1999, Brazil was a financial basket case. In 1998 and 1999, its finances were such a mess that Brazil got the biggest IMF rescue package in history up to that point, $41.5 billion.

During the 20th century as a whole, Brazil had a cumulative inflation rate of more than a quadrillion percent. If you were a net saver in Brazil and kept that money in Brazil’s currency, you lost big. You might as well have set the money on fire.

Today, Brazil is in a different position. The currency is so strong, its politicians fret. American travelers find no bargains in the shops of Sao Paulo or Rio. Brazil, too, has huge currency reserves and is now a net creditor, not a debtor. Brazil is even accumulating gold — the real thing. We met with an economist on our trip here who made a presentation that showed Brazil’s central bank has 5% of its reserves in gold — and it’s been buying more.

Today, U.S. investors go out of their way to buy products that give them exposure to Brazilian reais, instead of U.S. dollars. It’s incredible when you think how much things have changed in just the last 10 years.

Of course, Brazil could screw it up again.

There are some worrisome signs. The new favorite for president is Dilma Rousseff. She is a former Marxist guerrilla. Captured in 1970, she was beaten and tortured. Hers is a quite a tale, and you can find out more about her on the web. The Wall Street Journal also recently featured a front-page story about her.

Suffice to say, she has since mellowed out, supposedly. Most see her as simply continuing the policies pursued under current President Lula. But we’ll see…

As with any emerging market, there are big problems, but also big opportunities. Still, Brazil’s economic challenges seem less complicated and smaller than those in the U.S., where debt and deficits are much larger. And currency screwups are relative. Forced to make a choice, I’d rather bet on the Brazilian real than the U.S. dollar.

[Editor’s Note: If you want to add exposure to economic growth in Brazil, the easiest solution is to buy Brazilian stocks – thereby avoiding (some of the) risks of inflation in the real. If you’re not familiar with specific Brazilian companies, the easiest option to buy shares of one of the popular Brazilian exchange-traded funds on the market.

Leading the pack is the iShares MSCI Brazil ETF (NYSE: EWZ), a fund with more than $11 billion under management, weighing in as the largest single country ETF outside of the United States. But for penny stock investors, another attractive option is the Market Vectors Brazil Small Cap ETF (NYSE: BRF), a much smaller fund that focuses exclusively on small-cap stocks in Brazil.]

Sincerely,
Chris Mayer
Penny Sleuth

October 7, 2010

Two Ways to Add Brazil to Your Investment Portfolio was originally featured in the Penny Sleuth.

In our meetings, we met an economist who got everyone’s attention when he started talking about Brazilian financial products and how he’s averaged 25% a year in the last few years without doing any work (I’m suspicious). Asked how to get into these products, he said they are open only to Brazilian residents. Initially, he made his investments through his wife, who is Brazilian.

This led the reader to say, “I’m going to invest in a Brazilian wife.”

While that may not be a bad investment for some, the opportunities in Brazilian agriculture are what inspire our trip.

We started in Campo Grande, which is in an interior state called Mato Grosso do Sul. It is a big producer of soybeans, sugar and more. Seasonally, we’re at the end of what passes for winter in these parts. Yet temperatures hit 100 degrees while we were out and about. It was dry and dusty with strong winds.

Water comes from nearby rivers and a huge underwater aquifer. There is also a healthy amount of rain for about half of the year. The land is also flat. Professionally managed, it becomes highly productive farmland.

Anyway, we endured the heat and some long bus rides to see farmland properties in the cerrado, the vast grasslands of Brazil and the soil bank of the world.

This is the land that will help feed the growing global population. Brazil is a great beneficiary of that need and has become an agricultural power. (One that’s fuelling more than a few small-cap stocks right now) It also has a lot of room to go, as it has more usable arable land than any other country in the world.

The New Middle Class of Brazil

This really gets to the heart of change in Brazil. There is a rapidly expanding middle class here. Over the last six years, Brazil’s added some 30 million middle-class consumers. They are only starting to enjoy products we take for granted, like yogurt. “Brazilians are eating yogurt for the first time,” Renato Roscoe told us.

Renato is a soil expert and former Embrapa hand. (The latter is a government agribusiness research institute). He holds a Ph.D. in soil science and knows these lands well. He gave our group a good presentation before we embarked for our farmland tours. In that presentation, he also made some interesting remarks on the politics of Brazil.

“We’re happy because we are getting richer,” Renato said. That happiness is reflected in voter patterns. Whereas the incumbents are in trouble in the U.S., in Brazil, they enjoy widespread support. Of the 26 states that will elect governors this year, 18 will re-elect their existing governors or vice-governors by wide margins. And Dilma Rousseff is way ahead nationally in part because she is seen as continuing the policies of President Lula.

Not only is the middle class expanding, but Brazil is also minting millionaires. Only nine countries have more millionaires than Brazil, according to one study cited by Larry Rohter in his new book Brazil on the Rise. “With about one-sixth the population of India, Brazil has more millionaires than India,” he writes.

Rohter goes on:

“In a matter of a few years, Brazil has seen a new surge in entrepreneurs who have built fortunes from activities as diverse as airlines, cosmetics, slaughterhouses, shoes, toys and computers… This phenomenon, particularly notable in sectors such as agriculture and ranching and oil and mining, was accompanies by a burst of spending on luxury items ranging from jewelry and designer clothing to private airplanes and yachts.”

Given that context, you can understand some of the success companies are having in Brazil. Whirlpool is one example. According to the company, one in six Brazilians already has at least one of its appliances. In agriculture, AGCO — a maker of farm equipment — saw sales in South America rise 71% in its second quarter, thanks mostly to Brazilian farmers.

Then there are the Brazilian companies. Vale, the giant mining firm, is looking to become one of the world’s largest fertilizer companies. It wants to boost potash output tenfold by 2017 and triple its output of phosphates. It will do this through acquisitions and investments in its own mines. Clearly, it sees the opportunity to serve farmers in its own backyard.

I’m looking at other opportunities to tap into Brazil’s growing markets and have much more to share with you. But for now, I have to sign off. The giant metropolis of Sao Paulo is up next…

Sincerely,
Chris Mayer
Penny Sleuth

September 27, 2010

Profit From Brazil’s New Middle Class Consumers was originally featured in the Penny Sleuth.

In 1912, 21-year-old Williams gained fame as a survivor of the sinking of the RMS Titanic.

Later that year, he went on to earn his first U.S. mixed tennis championship.

Now a member of the International Tennis Hall of Fame, there wasn’t much Williams didn’t win.

He was a 1924 Olympic gold medalist, Wimbledon champion and a five-time U.S. tennis champion.

On top of all his accomplishments, he was also a highly successful investment broker. Unfortunately for Williams, that was also his unraveling.

He became a partner in an investment firm called C. Clothier Jones & Co. in 1929. His business partners in the small $5 million firm ($61.5 million today) were some of the brightest, most successful investors in the world.

Of course, after the stock market hit the skids in 1929, the company took a hit. But thanks to the rally in first half of 1930, C. Clothier Jones & Co. was in better shape than ever.

He was on top of the world in the spring of 1930. But just like the year before, market speculators pushed stocks higher than they were worth. By late summer, the rally turned into another massive sell-off.

When October came around, Williams and his partners were doing everything they could to stay in business. Their investments turned to dust, and they were so incredibly overleveraged the only course for them was to fudge some numbers and blatantly lie to shareholders.

Williams left the country in mid-October to get married in Europe. By the time he returned, he was a wanted man, for market manipulation. Four of his colleagues and large investors in the company had ended their own lives in that single week.

We are facing another summer of 1930. The rally that started in March of this year is eerily similar to what made Williams and his partners look like kings of investing.

Luckily, you don’t have to end up like them when the house of cards falls again…

Take Advantage of the Global Edge

We’re fortunate to have history lessons when trying to figure out the market. But there are certain aspects of today’s market that just weren’t there in 1930.

Some, like trade imbalances and foreign lending, make today’s global economy a scarier environment. Others, like emerging economies, give us a serious advantage over our forefathers.

Even if the average investor of 1930 were aware of a possible second downturn, his options would be incredibly limited. Only a millionaire in 1930 could invest in other, safer economies. Of course, even that would’ve been difficult, since those were so few and far between.

Today, it’s as effortless as buying an ADR through your online broker. But as last time, figuring out which ones to buy is no easy task.

I ramped up my Lifetime Income Report portfolio to reflect my favorites: Asia, Africa and Latin America. Every single one is showing strong double-digit gains and safe, growing dividends. And I expect them all to thrive even if this is another 1930…

I just added another international giant in my absolute favorite country, and it’s set to do even better. To learn more, just click here…

Sincerely,
Jim Nelson

November 19, 2009

A Lesson from 1930: Avoid the Second Collapse with This 6.9% Brazilian Yield was originally featured in the Penny Sleuth.

But you’re not out of luck just yet…

Many countries around the world will be able to steer around this extended recession. Some are even in prime position to explode.

And it’s not as difficult to invest abroad as it may seem. Today, it’s as effortless as buying an American Depositary Receipt — same thing as a stock — through your online broker. Figuring out which ones to buy is the hard part.

In Lifetime Income Report, we’ve ramped up our portfolio to reflect our favorites: Asia, Africa and Latin America. Today I’m letting Penny Sleuth readers in on two south-of-the-border plays you can play immediately…

Escape the Second Downturn on Lula’s Coattails

Our favorite international plays come from Brazil. This probably doesn’t come as a surprise. We’ve been bullish on Brazil for over a year now.

The Brazilian economy has never looked better. For starters, the democratic government of President Luiz Lula da Silva is both popular and smart. Instead of leading the Brazilian people down the same road they always seem to end up on — collapsing currency and enormous income disparity — Lula re-cemented the federal and state budgets, brokered trade deals across the globe, and brought the country’s economy into top-ten status.

This success helped him win a landslide reelection in 2006. Even his political opponents can’t discount the success he’s had in making sure Brazil didn’t fall into the same recession that’s now captured the rest of the globe.

Sure, smaller export numbers and commodity prices have put a small hold on Brazil’s growth. But by this time next year, the country’s GDP should be back up to a 3.5-4% growth rate.

Lula has been able to do this by placing a little fiscal responsibility into a system that’s rarely had it. It’s been just 11 years since Brazil suffered from its last currency crash. Thankfully, the country adjusted its currency after that fiasco, completely taking the real off the U.S. dollar peg.

This is probably the most important reason Brazil is now starting to garner some recognition as a safe haven for growth investing.

The federal deficit and spending habits here in the U.S. can only hold for so long. Even China — the country holding more U.S. Treasury Notes than any other — recently remarked that it would like to drop the dollar as the world reserve currency.

Having a currency that’s not pegged to the dollar is a huge benefit in today’s inflationary world.

But besides a superior currency, Brazil investments come with many other perks that interest smart investors.

The Brazilian Advantage

Take tax rates for instance. It’s easy to find foreign plays that pay large dividends. It’s difficult to find ones that don’t have a cut taken off the top just because you’re a foreign investor.

Canada is the most common example. Until very recently, Canada had some of the best royalty plays in the world. The vast resources of our neighbor to the north translated into large income distributions for investors.

That all changed in 2006, when the Canadian Finance Minister Jim Flaherty decided to take advantage of all the rich American investors coming across the border for those large yields. Now, if you are an American, you have to pay his government 15% on all Canadian income trust distributions you receive.

This is a new trend developing throughout the investing world. Fortunately, there are a few safe income havens left. Brazil, Great Britain, Indonesia, Hong Kong, and Mexico are the five zero-tax-withholding countries that we are focused on.

Another perk Brazil has to offer is its rapid acceleration on the world stage. Lula’s popularity and successful reforms have helped put a spotlight on South America’s largest country.

Not only is Lula’s voice highly anticipated in any international gathering, his ability to highlight his country’s tourism-friendly assets helped Brazil lock in the 2014 World Cup and 2016 Summer Olympics.

Of course, just having a great investment location isn’t enough. You need to have the perfect investment to take advantage of it. And we have two of them…

Grab Green Income with the World-Leading Hydro Generator

When most people think of renewable energy, they think of wind farms and solar plants. But one of the most widely used forms of renewable energy is hydroelectric. And no country knows more about hydropower than Brazil.

The Itaipu hydroelectric dam, located on the Panara River between Brazil and Paraguay, is currently the largest in both capacity and annual generation in the world. The site generates nearly 100 billion kilowatthours (Bkwh). That would be enough to power 11.2 million U.S. homes. That might be why the American Society of Civil Engineers picked it as one of the Seven Wonders of the Modern World.

Brazil entered into an agreement with Paraguay in 1973 to build and share the electricity produced from Itaipu. Currently, Paraguay uses it to power more than three quarters of its electricity needs, selling the rest of its share to Brazil.

It was during that 1973 treaty signing that Brazil decided to go headlong into the hydropower business.

The South American leader now generates more than 372 Bkwh per year from hydroelectricity — 85% of total generation.

Brazil is also expanding its capacity at a rapid rate. Over the next 20 years, only China will be generating more electricity from hydropower plants.

Lula’s government has spent plenty to back hydropower expansion. Most of the $221 billion earmarked for infrastructure, transport and energy in Brazil’s stimulus plan is slated for hydro capacity increases.

To take advantage of Lula’s hydropower initiatives, and reap the rewards of Brazil’s fast-growing economy, you should take a serious look at these two hydro giants:

• Companhia Paranaense de Energia (NYSE: ELP) is a major player in the Brazilian hydro market. The company owns 17 different hydro plants, most of which are located on the Panara River. The stock is in position for an easy double from here.

• Enersis (NYSE: ENI) owns and operates 53 power plants — most of which are hydroelectricity plants — that have an installed capacity of more than 14,000 MW. We could see units of ENI continue to climb over the next year. Meanwhile, you’ll be able to collect large dividend yields for as long as you hold it.

While they’re bigger than most of the opportunities that we talk about in the Sleuth, they offer the some of the best exposure to the burgeoning utility sector in Brazil. I expect them — and other Brazilian ADRs — to do well in the coming months regardless of where the market heads here at home.

Sincerely,
Jim Nelson

November 6, 2009

Two Brazilian Plays to Beat the Market was originally featured in the Penny Sleuth.

Brazil is certainly in this basket of falling markets. Fortunately for you, it shouldn’t be.

Sure, more than half of Brazil’s exports are commodities like soybeans and iron ore. But there’s a very good reason why Brazil is a safer investment than most — stability. Before you get started, let me explain…

Over the past two decades, Brazil has gone through many crises. Each one taught the country how to handle poor economic situations. But it was the most recent one that puts us in a tremendous advantage.

After so many years of falling on its face, Brazil elected President Luiz Inacio Lula da Silva. Leaving our opinions aside, Lula has done something to put the country in the driver’s seat this time around.

At the beginning of this decade, the world punished Brazil for its high debt levels. Its market crashed, erasing years of growth. Since this pseudo crisis, the Lula administration has stabilized the country’s economy and paid down debt. On top of these moves, it’s also put tough regulations in place across many industries. Most investors thought these regulations limited growth, which they did. But now investors – or, at least, smart ones – see the regulations as necessary evils.

By regulating industries like energy and finance, Brazil kept a steady, stable growth rate of about 4% in recent boom years. The rest of the emerging nations of the world were getting used to a 7% rate. These other “emergers” were funding their growth by leveraging their assets and creating massive debts. Brazil was paying its down, while accruing next to no new debt.

The overall stock market hasn’t noted this major difference, however. Brazil’s major index, the Bovespa, is down 40% over the last 12 months – alongside the rest of the world.

While others struggle with “bad assets” and massive debts, Brazil will be ready to strike.

Energy is our favorite way to play Brazil. Without energy, you can’t expand. Just look at what China is doing these days. As it continues to come online, it burns through more coal and oil than anyone could have imagined. Brazil, while it’s no China, is still demanding an enormous amount of energy.

The largest difference between Brazil and China is the regulations. There are many more aggressive mandates in the Brazilian energy industry than most Chinese, or Americans for that matter, can even fathom.

For instance, there’s been a lot of talk in recent years here in the U.S. about switching regular gasoline for ethanol to power our light vehicles. Brazil has been doing this since 1975. That’s over 30 years of mandates, which require all light vehicles to use at least 25% ethanol blends. The country is the world leader in ethanol efficiency. That came from strategic mandates.

The rest of the Brazil’s energy situation is no different. In recent years, hydroelectricity became the country’s energy solution. Now 80% of Brazil’s electricity comes from hydropower. This energy revolution places Brazil 42nd in CO2 emissions worldwide. It produces less CO2 than countries like Israel and the Philippines, which are just fractions of Brazil’s size and population.

Early investors in Brazil’s booming hydropower industry stand to make massive gains, while the rest of the world’s nations are trying to put their own economies back together. That’s where you need to be looking.

Sincerely,
Jim Nelson

March 9, 2009

Brazil’s Hydropower Advantage was originally featured in the Penny Sleuth.