Date: January 19, 2025
By: Benj Gallander
As many of our readers know, we do the majority of our buying toward the end of the year. Why? Quite simply, we like to purchase while others are engaging in tax-loss selling and unloading names somewhat indiscriminately. They dump their losers into the trash bin; this increased supply lowers the price and we swoop. Sounds exciting, no?
However, as 2024 wound down, Benj purchased less than in any year of his investing history. Yes, that covers a very long time frame, spanning more than 45 years. Venturing through his regular filters to find badly beaten-down stocks – those that have dropped at least 50 per cent and traded at much higher levels for an extended period, say seven of the past 10 years – was not fruitful. So he chose to buy only two stocks.
For one, he went to Brazil, figuratively speaking, although it would have been delightful to travel there and do field research. The International Monetary Fund considers this to be an upper-middle-income developing mixed economy. It has the ninth-largest GDP in the world, just ahead of Canada’s (not to mention the glorious beaches and beautiful weather).
On top of that, Brazil is the third-largest economy in the Americas and growing quickly. Certainly, there is lots of potential, and helping this along is Banco Bradesco, headquartered in Osasco, Brazil, the 85th-largest bank in the world by total assets and the third-largest Latin American bank. In addition to Brazil, it operates in six other countries, boasts 5,314 branches with 38,430 employees and has a long, successful history, being founded in 1943.
Though surrounded by the country’s instability, Banco Bradesco is remarkably stable. For each of the last 10 years, the enterprise was profitable, and though revenues last year were just north of US$100-billion, profit slid to US$2.85-billion. In eight of the previous nine years, it had been more than US$4-billion. The share count, though varying somewhat year to year, rests just north of 11 billion.
The bank’s lending focus has been primarily individuals and small- to medium-sized businesses. Importantly, while the loan portfolio is growing, delinquencies have been decreasing as the bank has improved its collection processes. That is huge for the bottom line.
The second key appendage for BBD is a large insurance arm, selling dental, travel and life products. The enterprise also focuses on real estate credit, mortgage and agribusiness loans, debit and business cards, along with foreign currency exchange operations. It has been growing quickly and in recent years acquired Banco do Estado do Maranhão, Banco Mercantil de São Paulo, Banco Ibi SA, and the Brazilian operations of Banco Bilbao Vizcaya Argentaria. In all likelihood, more takeovers are in store.
Meanwhile, there is a transformation plan occurring as the bank invests in technology to keep up-to-date with the continuing changes in the financial sector. One area being focused upon is optimizing cash management to reap additional benefits from money that is being underdeployed. This could add a nice uptick to the bottom line.
There are notable company-specific risks here. They have lent out more money in loans than they have taken in via deposits. This generates two problems. First, to cover the shortfall the organization has taken on significant debt, and second, it means if depositors get scared there is little wiggle room to stave off a bank run. Unsurprisingly, the company’s credit is rated as junk by rating agencies.
A major consideration for investors thinking of buying into this company is currency risk. Overall, the Brazilian real has been a weak performer. This is in large part owing to the government’s finances. Brazil’s budget deficit equalled 8.9 per cent of GDP in 2023 compared with 6.2 per cent in the United States and 1.4 per cent in Canada. This is a significant problem, as U.S. GDP, for example, is growing at 3.1 per cent while Brazil is shuffling along at 0.9 per cent.
Recent austerity measures have come up short of market expectations and pressure is mounting on the government to do something dramatic. At some point, the currency situation will reverse, but knowing when that will happen is difficult. There is only so much Brazilian companies – including BBD – can do, as long as the real remains under pressure.
Since 2007, Brandesco’s stock has had a spiky price chart. Worth noting is that numerous times since then it has crested the US$8 level, albeit the last time was in 2019. Still, the initial sell target is being set at US$10.24, miles from the purchase price of US$2.03. It trades around US$1.90 now. Yes, we acknowledge the sales target might be a stretch and will continue to re-evaluate that goal over time. Meanwhile, pocketing the inconsistent dividend that regularly varies in size when it is paid should add handily to our returns.
Bank stocks have been one of the sectors in which we have thrived. Bank of America was purchased at US$6.76, and the final sale was at US$38.79. Fidelity Southern joined us at as low as US$2.76 and cheerfully departed at US$18.74. There are numerous other examples too, especially in the aftermath of the U.S. financial crisis. Perhaps, and only perhaps, Brazil’s BBD will prove as fortuitous. Maybe it will even pay for a visit to the country.
Stay tuned to learn about the second stock Benj bought in our next column.