Brazil Hedge Fund’s Odd Stock Pick: Companies With Tons of DebtBy
Versa betting BR Malls, Gafisa to benefit from easing cycle
Fund is outperforming 96% of peers with 177% gain in dollars
One of Brazil’s top hedge-fund managers is loading up on stocks of highly indebted companies, betting they stand to gain from cuts to some of the world’s highest interest rates.
The thinking goes like this: Stocks of companies such as BR Malls Participacoes SA and Cia Paranaense de Energia SA, or Copel, have been beaten down because of concern the expenses to service their debt are too high. But those costs should come down over coming months and years assuming the central bank comes through with the interest-rate cuts analysts and traders are expecting, according to Luiz Alves, whose stock fund has outperformed 96 percent of peers this year.
"The opportunity we see right now is stocks exposed to interest rates," said Alves, who manages the Versa Long Biased FI Multimercado from Sao Paulo. He forecasts the Ibovespa gauge will remain mostly flat over coming months after surging 64 percent this year in dollar terms, making it the best performing stock benchmark in the world. Versa, which uses leverage to boost returns, is up 177 percent.
BR Malls, a shopping mall operator, has underperformed the Ibovespa as its leverage ratio almost doubled in the past year. Copel has seen its debt more than double in three years. Alves also likes homebuilder Gafisa SA, which he says is poised to benefit from a rebound in construction and higher demand for home loans if interest rates fall.
The tiny, 6.5 million real ($2 million) fund’s biggest holding -- and the one that has been the biggest driver of gains this year -- is car rental company Cia. de Locacao das Americas, which Alves saw trading at a 35 percent discount to the value of its fleet of 30,000 vehicles. The stock has added 86 percent this year in dollar terms.
Versa’s leverage increases its exposure to stocks to the equivalent of about 20 million reais. GTI plans a roadshow for early next year to promote the fund and attract more investors, Alves said. He is a partner of GTI Administracao de Recursos Ltda., an asset manager set up in 2007 that also has 100 million reais of assets at its GTI Dimona Brasil FIA fund, which has outperformed 97 percent of peers.
Versa’s worst wager this year was a bet that the fund made on Rumo Logistica SA, Brazil’s largest train and port operator, which soured after the controlling shareholders announced a 2.4 billion reais capital increase. The stock is up just 15 percent in dollar terms this year.
After the Ibovespa’s jump in 2016, Alves is planning to bet on declines in stocks that have reached "mini bubble" levels amid forecasts for tepid economic growth. One short bet is on drugstore operator Raia Drogasil SA, which has almost doubled in the past two years.
"It’s trading at 70 million reais per each of its pharmacies, when it costs less than 1.5 million reais to build a new one," he said. "That is exactly the kind of bubble that we look for in our shorts."
The fund is also shorting futures of the S&P 500 Index, betting U.S. stocks will underperform amid rising interest rates and after reaching record highs and lofty valuations.