Covestor

The model resumed the upwards trend during July, gaining 9.24%, driven mostly by strong Brazilian and Chilean equity, especially in the financial and real-estate sector, where I had significant exposure.

In August, some articles that encourage investments in South America are being featured in financial media. One is the cover story of the current issue of Bloomberg Markets, about Pimco’s new interest in stocks (this company manages the world’s largest fixed-income fund, PTTRX, and was always associated with bond funds). I quote from the article: “Driving Pimco’s move into equities is [C.E.O.] Mohammed El-Erian, who says the global economy is entering a period of fundamental transformations that he calls the ‘the new normal.’ El-Erian says mounting deficits and tighter financial regulation will dampen growth in the U.S. and the eurozone for the next three to five years. Emerging-market nations such as Brazil and China, with stable levels of government debt and expanding middle classes, should continue to thrive, he says.”

Another article on this line, titled “The Case for Going Global: 5 Reasons to Ignore the Chaos and Invest Abroad,” takes the cover of SmartMoney. It states that a growing number of advisers are “urging clients to make a serious shift abroad, arguing that much of the rest of the world is experiencing faster growth – and better returns – than the U.S.”, and says that many of these professionals now recommend that “investors should have at least a 20 percent of their portfolios in overseas investments and that younger, more aggressive investors could ratchet that up closer to 50 percent.”

Now let us go on with some holding rationales. Actually, I take in consideration so many factors when executing a trade that explaining a single rationale in full would take longer than a whole report and I would probably fail if I tried to make it clear and entertaining. I will better give some highlights that I find particularly interesting. So please bear in mind that these are just highlights, and that assembling a portfolio is more than picking individual stocks because you also need to consider how these positions work together.

NII Holdings (NIHD), owners of the Nextel brand of wireless communication services for businesses in Latin America, presents multiples that are similar to its competitors’, or we may even say that they are somewhat worse. But if we analyze more thoroughly we see it poised for stronger growth, thanks to a superior service, a profitable and well-run business model, and the sale, earlier this year, of a minority stake of its Mexico operations to Televisa (TV) at an attractive price. The effect of this sale on the growth perspectives of the company is twofold: they obtain a business partner with financial muscle in Mexico, and a pile of cash for expanding in Brazil, a country with a fast-growing wireless sector where other companies are suffering from “growing pains” such as unbalanced infrastructure investment.

Cristopher King, principal analyst of global telecommunication services for Stifel / Legg Mason, was quoted by the Wall Street Transcript this month saying that they believe NII Holdings is “the fastest-growing telecom company in the world right now.” He mentions it as their top pick with a target that is roughly 50% higher than the actual price.

We had quite a ride with NIHD, acquiring it at inception of this model at $36.12 on December 8, 2009, selling the majority of the holding on April 7, 2010 at $42.44, and repurchasing it at $37.51 on July 27, 2010. As always, a good company is a good stock only when it is attractively priced, so I will keep monitoring this and the other positions to see if I consider them worth holding or if I rather sell any and, if possible, repurchase after a correction. You may have seen that I do that sometimes, but I do not try it too often because, when selling, the probability of success has to be high enough to justify the tax consequences. Success does not depend solely on the price being too high, but on the markets taking notice in reasonable time. Nevertheless, if a correction does not come, it is not a big problem, because the proceeds of the sale can be used to take advantage of an opportunity elsewhere. Or, if a subsequent analysis indicates that the stock was not over-priced when sold, another possibility is to recognize the error and repurchase.

Another of our July trades was the expansion of my position with Exeter Resource (XRA). That is another stock that we purchased on December 8, 2010 at $6.01 and sold roughly 20% of the holding on March 2, 2010 at $8.70. But in this case I had made it for rebalancing reasons, as I was not expecting the pullback that the stock has been experiencing lately. By the way, if you review our history with Exeter, please bear in mind that they spun out their Argentina operations into a new company, Extorre Gold (TSX: XG), in March. Therefore, my proceeds from selling Extorre were gains from holding Exeter (I sold it shortly after the spin-out because the new stock does not trade in the US).

This month I expanded my position in XRA because the stock has continued with its downwards momentum even though copper prices have recovered and the company’s main asset – the Caspiche project in the Chilean Andes – remains attractive in my opinion. This is an advanced exploration project that may become a large gold and copper mine with tens of billions of dollars in reserves. Big mining companies need considerable amounts of reserves to spice up their balance sheets and compensate for the mines they are depleting, so it is reasonable to expect an offer for the purchase of the project or a merger offer for the whole company.

Earlier this year, Barrick Gold (ABX), the world’s largest gold miner, closed a deal with  Kinross Gold (KGC) for the purchase of a 25% interest in Cerro Casale, a neighboring and similar project, for $ 475 million. That is more than Exeter’s market capitalization. Besides, I have a bullish outlook for gold in the mid to long term, as I explained on this model’s May report. I consider Exeter to be a good gold and copper play that opened on August 2, 2010 at an attractive price of $5.84 (http://www.google.com/finance?q=AMEX%3AXRA).
Speaking of big gold-mining projects, another one of my holdings, Silver Standard (SSRI), has published some drilling results for their Brucejack property that look very interesting (at least at first sight) hitting more “bonanza” grade metallization on some of the meters that were sampled. I need to analyze the report more carefully, but I am curious about why the markets did not respond to this news more actively (yet).
Another one of our holdings was aircraft-manufacturer Empresa Brasileira de Aeronautica (ERJ), better known as “Embraer”. Reuters reports that they sold a remarkable $ 7 billion at the Farnborough Air Show that took place last week in the U.K. Two important motives for holding Embraer in this model are the quality of their products and the trend towards renewing airline fleets with more-diverse and fuel-efficient airplanes – this news seems to confirm the weight placed on those qualities.

One holding that did not present such good news – quite the contrary – was agribusiness company Bunge (BG), which plunged about 14% on July 29, 2010 after reporting disappointing results for the second quarter and lowering their 2010 outlook significantly. I see some high points in this company, so it crossed my mind to take advantage of the dip by expanding my position, which would have been a profitable play because, on the following day, it recovered around half of what it had lost. But it would have been a mere bet, because I was taken by surprise by the news and did not fully understand the reasons for those poor results, particularly the amount that was cut-back from the outlook. Given the sharpness of the decline and subsequent rebound, it seems that I was not the only one... This is my remaining agribusiness position now that I sold Cresud (CRESY) a few months ago, so I would not want to close it unless I open a new one from that sector or a similar one. But these developments demand a reassessment of the company.