Argentina

[PlanMaestro]

Is there anyone that can comment on recent events in Argentina from a value investing perspective? Some Argentinian stocks are starting to look really cheap. Meanwhile, it seems that the small non-Repsol shareholders of YPF are emerging whole (but with an irrational controlling shareholder that who knows what is going to do later).

 

http://online.wsj.com/article/SB10001424052702304432704577349830438299066.html?mod=googlenews_wsj

 

 

[Packer16]

The one data point I keep in mind for emerging markets is the largest decline in value for emerging market stocks is from expropriation.  If a country does not show respect for large foreign corporations, how do you think they will treat small foreign minority shareholders.  Unless you have an edge in terms of political connections, in my mind markets like Argentina, Venezula and Russia aren't worth spending time on because your value investment could be expropriated for the good of the people.  Just my 2c.

 

Packer 

[NormR]

I raised my eyebrow when they threatened to arrest economists for trying to calculate inflation.  Oh, and fixing the price of Big Macs to avoid bad news from the Economist's annual PP survey.  :o  In other words, you know your system is F'd when ...

[eclecticvalue]

There is an opportunity in CRESY. MOI is covering it, check out the video that explains the opportunity.

[txitxo]

  Forget about Argentina. The government there is totally focused on the short term, trying to find resources to keep the public spending machine going in an attempt to win 2/3 majority in the congressional elections and amend the Constitution to get Cristina Fernández an additional term. They are following the Hugo Chávez manual to the letter. Remember that Warren Buffett still keeps a Cuban stock certificate as a reminder that, no matter how good the fundamentals, country risk can and will kill you. Argentina had one of the highest GDP/person in the world in the first half of the XXth century, in fact it is still one of the best educated countries in the world. And look at them now. Compare their trajectory in the last 40 years with Brazil or Chile. There are countries which choose to self-destruct, and there is nothing you can do apart from getting the hell out of them.

 

  The contrarian thing to do is give a good look at the Spanish stocks, some of which are very cheap. Repsol boss, Brufau, looks extremely relieved to be out of Argentina. They are suing the Argentinian government,  trying to recover as much cash as possible to focus on their extremely interesting partnership with Petrobras to exploit the pré-sal findings in the Brazilian atlantic coast. There are plenty of other Portuguese and Spanish companies which obtain most of their earnings outside the Iberian Peninsula (and outside places like Argentina) and which are suffering unfair group punishment. For instance have a look at the top 5 holdings of Bestinver Bolsa: Semapa, Sonae, Corporación Financiera Alba, Ferrovial, Portucel, etc. Those guys are hard-core value investors, who have been beating the indexes by 7-8% for decades.

[petec]

eclectic, who are MOI and do you have a link to the video?  I personally can't see value in CRESY unless Argentina lifts its ag price restrictions (and even then I'm not an ag bull) but I see opportunity in IRSA, the property subsid.

[PlanMaestro]

The one data point I keep in mind for emerging markets is the largest decline in value for emerging market stocks is from expropriation.  If a country does not show respect for large foreign corporations, how do you think they will treat small foreign minority shareholders.  Unless you have an edge in terms of political connections, in my mind markets like Argentina, Venezula and Russia aren't worth spending time on because your value investment could be expropriated for the good of the people.  Just my 2c.

 

Packer

 

Truth.

 

However, I would not put Argentina along side Venezuela or Russia.

 

This looks more about economic incompetence than a power coup . Trying to control inflation alongside runaway spending after the early 2000s crisis, the Kirchners put controls on energy costs. That put a stop of energy investments and a dependency on foreign imports. Instead of unwinding the controls when Argentina got out of the slump, that had a purpose, the Kirchners double down

 

The balance of payments concerns are so high that banks dividends were stopped by the Central Bank (directed to the Spanish banks that were redirecting funds to manage their own problems). In this circumstances, it seems that the expropriation of  Vaca Muerta oil field was too much temptation even if nobody knows who is going to fund the needed CAPEX.

 

Argentina is a very difficult country to manage. It looks more like things getting out of control for Cristina and she is clutching at straws. Rumors are that Petrobras Argentina is next.

 

The thing is that ALL stocks are suffering not just the energy related.

 

http://www.ft.com/intl/cms/s/0/caf527bc-88a9-11e1-9b8d-00144feab49a.html#axzz1sLyr8O5O

 

 

[PlanMaestro]

The contrarian thing to do is give a good look at the Spanish stocks, some of which are very cheap. Repsol boss, Brufau, looks extremely relieved to be out of Argentina. They are suing the Argentinian government,  trying to recover as much cash as possible to focus on their extremely interesting partnership with Petrobras to exploit the pré-sal findings in the Brazilian atlantic coast. There are plenty of other Portuguese and Spanish companies which obtain most of their earnings outside the Iberian Peninsula (and outside places like Argentina) and which are suffering unfair group punishment. For instance have a look at the top 5 holdings of Bestinver Bolsa: Semapa, Sonae, Corporación Financiera Alba, Ferrovial, Portucel, etc. Those guys are hard-core value investors, who have been beating the indexes by 7-8% for decades.

 

That is an interesting point of view. The thing is that many Spanish firms are arguing that the problems in Spain are overblown because of their large Latin American presence. But if they are stopped from repatriating funds, like the Argentinian banks recently, the argument can show some cracks.

 

These are some of the Spanish firms with Argentinian presence Gas Natural Fenosa, Endesa, Santander, BBVA, Mapfre, Telefónica, ACS, OHL, NH, Sol Melia, Inditex.

[Packer16]

Unless I missed something, hasn't Argentina gone through a number or nationalizations through its history?  It appears property rights are not that important or are selectively important and the country (unlike the US) does not have history of property rights protection over long periods of time (especially for foreigners).  If that is the case, how can you feel comfortable the value you find will not be expropriated?  Chavez began with oil and gas and eventually ended up taking other assets.  I just do not how to handicap such risks unless you think things will get better for property rights. 

 

Packer

[txitxo]

The contrarian thing to do is give a good look at the Spanish stocks, some of which are very cheap. Repsol boss, Brufau, looks extremely relieved to be out of Argentina. They are suing the Argentinian government,  trying to recover as much cash as possible to focus on their extremely interesting partnership with Petrobras to exploit the pré-sal findings in the Brazilian atlantic coast. There are plenty of other Portuguese and Spanish companies which obtain most of their earnings outside the Iberian Peninsula (and outside places like Argentina) and which are suffering unfair group punishment. For instance have a look at the top 5 holdings of Bestinver Bolsa: Semapa, Sonae, Corporación Financiera Alba, Ferrovial, Portucel, etc. Those guys are hard-core value investors, who have been beating the indexes by 7-8% for decades.

 

That is an interesting point of view. The thing is that many Spanish firms are arguing that the problems in Spain are overblown because of their large Latin American presence. But if they are stopped from repatriating funds, like the Argentinian banks recently, the argument can show some cracks.

 

These are some of the Spanish firms with Argentinian presence Gas Natural Fenosa, Endesa, Santander, BBVA, Mapfre, Telefónica, ACS, OHL, NH, Sol Melia, Inditex.

 

None of those companies is so exposed to Argentina as Repsol, which derived 26% of their profits from YPF. For instance Argentina represents only 3% of the Santander Group earnings, or 5% of the BBVA. Brazil and Mexico are much larger markets for Spanish companies.

[PlanMaestro]

Unless I missed something, hasn't Argentina gone through a number or nationalizations through its history?  It appears property rights are not that important or are selectively important and the country (unlike the US) does not have history of property rights protection over long periods of time (especially for foreigners).  If that is the case, how can you feel comfortable the value you find will not be expropriated?  Chavez began with oil and gas and eventually ended up taking other assets.  I just do not how to handicap such risks unless you think things will get better for property rights. 

 

Packer

 

Like most Latin American countries.

 

You can say that European and Asian countries have their history too. Peron and the Peronists were modeled on some Spanish guy that the latest rumor says is still dead. I am not going to say I am an expert, just an observing neighbor from across the Andes that would much love to hear from the Argentinians themselves.

 

Argentina compared to other Latin countries has a decentralized power structure where the provinces, their governors, and their crony base are a real power (herding cats). That has made very difficult historically for Argentina to control spending. That was one reason that Cavallo decided to go to the extreme of "Convertibilidad" to put a straight jacket on the provinces.

 

The Kirchner power base is from their province, and to keep power they are running a corrupt transfer web, that has even corrupted the judicial system. But at the end this is mostly about enriching themselves and keeping power. There is no real ideology here, it looks more like the Mexican PRI than anything else. So it is very difficult to compare it to Venezuela (ideology) or Russia (centralized dictatorship).

 

Lately things are getting so complicated that Cristina is trying to raise national cohesion with the overused Malvinas/Falkland card. Since this nationalistic card is not gathering international support, while the economy is starting to dove tail, my impression (and it is just an impression) is that the YPF expropriation looks more like desperation.

 

The economy will continue to suffer a normal balance of payment crisis but with a flexible exchange rate that should mitigate the issues. If the above analysis is correct, the nationalization issues might be overstated and value at the right price in the right sectors, that are not controlled by foreign interests - like banking and utilities -, might be a possibility.

 

 

 

 

[PlanMaestro]

None of those companies is so exposed to Argentina as Repsol, which derived 26% of their profits from YPF. For instance Argentina represents only 3% of the Santander Group earnings, or 5% of the BBVA. Brazil and Mexico are much larger markets for Spanish companies.

 

True, for Telefonica is also like 5%. I thought it was higher for BBVA.

 

http://www.opinion.com.bo/opinion/articulos/2012/0417/noticias.php?id=52455

[PlanMaestro]

The problem of price controls:

 

http://www.clarin.com/sociedad/Gobierno-encaminado-faltan-productos-gondolas_0_685131726.html

[PlanMaestro]

A contrarian view from Argentina

http://blogs.ft.com/beyond-brics/2012/04/20/ypf-the-view-from-argentina-part-i-expropriation-was-right/

 

And a contrarian view from The Guardian

http://www.guardian.co.uk/commentisfree/cifamerica/2012/apr/18/argentina-critics-oil-nationalise

[PlanMaestro]

One interesting company to keep in the radar: Arcos Dorados (ARCO). Not cheap enough yet, but interesting cash flow ratios with room for growth. McDonald's operations all across Latin America but its biggest exposure by far is Brazil for the ones with concerns about its economy.

 

http://www.arcosdorados.com/attached/investors/1641_att_Credit%20Suisse%20Conference%20-%20London.pdf

[jjsto]

I just started looking at APSA as the shares fell 33% yesterday on seemingly no news....Unlike the US, shopping malls in Argentina face significantly less competition from online retailers, and lease rates per square meter continue to appreciate in $usd...

[PlanMaestro]

I just started looking at APSA as the shares fell 33% yesterday on seemingly no news....Unlike the US, shopping malls in Argentina face significantly less competition from online retailers, and lease rates per square meter continue to appreciate in $usd...

 

IRSA too that also has some assets in the US. If they maintain the dividends the yields are attractive.

 

Acquired 49% of a company which main asset is Lipstick Building located in 83rd at 3rd in NYC. Also owns 49% of the company owner of the building in 183 Madison Ave in the same city. Through subsidiaries, owns 10.5% of Hersha Hospitality Trust (NASDAQ:HT) and 3 million preferred shares of Supertel Hospitality Inc (NASDAQ:SPPR).

 

[jjsto]

IRSA is basically 95% of APSA plus some office buildings, hotels, the US investments, banco hipotecario, a couple of developments, some parcels of land and more debt.  In my opinion, there is something of a real estate bubble in Argentina right now (in spite of the fact that total real estate debt levels are less than 2%), and the market value of the properties in Argentina held by both IRSA and APSA is probably close to an all-time high.  Relative to the current market value of the properties, the stock of both is quite attractive.  And looking at the way rents increased the last 2 years, and are currently increasing this year, on the surface that would make it appear to be a very strong market.  That being said, I do not think the current rate of growth is sustainable over the next couple of years.  At some point there has to be an adjustment, and I dont know when or what that will consist of.  But, the stock is priced as if that adjustment was happening right now. 

 

Also, yesterday I bought a regular chicken sandwich at McDonalds with my US credit card.  In dollars it came out to $9.50.  Crazy.  (But a small part of that was collected as rent by APSA.)

 

Also, does anyone know the current status of the convertible shares in APSA?

[PlanMaestro]

Argentinian stocks crashed today ...

 

Argentina: pressure mounts on the peso

http://blogs.ft.com/beyond-brics/2012/05/14/argentina-pressure-mounts-on-the-peso/

 

For Argentines today, getting their hands on dollars has become a titanic task. Everyone, it seems, has both seen them and wants them. But virtually none are to be had, thanks to tighter currency controls in place since last week, in which most applications to buy dollars (a requirement since last October) have been rejected.

 

The result? An unofficial exchange rate that touched a record high of 5.18 pesos to the dollar, compared with a the lagging official rate of around 4.35, which the central bank manages, and appears keen not to let go too fast.

....

 

Devaluation would stoke inflation – an elephant-in-the-room-style problem which Fernández prefers not to recognise. She has urged unions to show restraint and rationality in wage demands which means, in other words, that they accept below-inflation rises or a wage cut. Yet there are some signs that the central bank is willing to devalue a little faster than hitherto thought, says Estudio Bein, a local consultancy.

 

 

 

[jjsto]

The unofficial peso "contado" that has no restrictions in the bond market was quoted at 5.47 last thursday.  In my opinion, it is physically impossible for growth/inflation to continue at the same rate over the next couple of years and at the same time maintain the current slow rate of depreciation in the peso.  Something has to give.  How big the shock will be, and when it will occur, I have no idea.  One main effect right now of the new currency controls seems to be slowing the real estate market as most transactions occur in dollars, and they are difficult to come by now.

 

That being said, the stock market is priced almost as if a severe crisis was occurring right now.  Relative to income, many companies seem to be priced as cheap as they were in 08-09.  There is almost no "local" investment in the stock market, and foreign investors are pretty nervous right now.

 

Disclosure: I am long a small amount of CRESY and IRS and have been trying to find some APSA USD bonds over the counter...

[PlanMaestro]

jjsto, have you checked the banks? I am following Banco Macro (BMA) that has been able to navigate all type of governments and was in good standing with the Ks. Capital ratios look good and the restriction to dividend payments will build its capital reserves to survive a crisis.

 

http://www.macro.com.ar/dnl/infoFinanciera/Presentacion%204Q11.pdf

[jjsto]

I have not checked the banks.  Historically, I feel like banks here In the big picture, serve to finance the government, take money from their depositors, and make actually doing a transaction in a bank as time consuming and as difficult as possible.  Also, a lot of the local banks are pretty opaque in their reporting.  I am also not sure that being in "good standing" (friendly) with the Ks is a good thing when it comes to banking...But, some of them are definitely cheap.  Personally, I put them in the "too hard" pile for myself.  A friend of mine that is a value investor down here prefers Banco Frances.

[PlanMaestro]

Good points.

 

My main worries with the Argentinian banks is a possible nationalization not the economy.  I do not think it is a high probability event though. Bank nationalizations in LATAM has been more a matter "have to" that "want to" compared with energy and mining for example. Governments do not like to be involved in banks, it is only headaches for a bureaucracy.

 

I like Banco Frances too, and dropped another 6% today, but it is part of BBVA and diplomatic relations with Spain are not in the best standing and might get in-between. K already used some strong language threatening the Spaniards with utilities and bank nationalizations ... where it hurts them (Endesa, BBVA, Santander).

[PlanMaestro]

Slim buys 8% stake in YPF.

 

El padre de Juan Manuel Abal Medina, el actual jefe de Gabinete de Cristina Kirchner, que está radicado en México, es el principal asesor de Slim para América latina.

 

http://www.ieco.clarin.com/empresas/millonario-mexicano-Carlos-Slim-YPF_0_718728362.html

 

 

 

[jjsto]

Yeah that is a crazy connection.  Never would have anticipated that...