Monday, November 19, 2007

Initiated a new position in Gafisa (GFA) - Brazilian Homebuilder

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Another tough day to be on the long side - what did I do? I bought a home builder! No, not one of those US kind... blah. I took some of the cash from what I sold off in my Ultrashorts and applied it to a new position outside the US. Gafisa (GFA) is a Brazilian homebuilder. I liken this position to Homex (HXM) which is a Mexican homebuilder that enjoyed a great 3 year run up to this spring. I am not sure why it is so weak of late (I held it in the fund early in quarter 1), but apparently the Mexican economy is much more tied to the US economy, and thus the coming US recession must be weighing on Homex. I look at Gafisa as where Homex was a few years ago; Homex has now "slowed" down to a 20% type of grower, which for a home builder is still great; Gafisa is approaching internet stock type growth, at 90-100% last year, and 30-35% going forward next year. Both countries (along with India/China) are learning the ropes about credit... previously cash based societies, now following the western path of "easy credit!" (careful what you wish for). So as mortgages become more common place, and credit markets more developed, home buying and real estate transactions should only grow in these countries.

I have bemoaned the lack of direct investment opportunities in Brazil compared to China (Gafisa is the only Brazilian IPO to list as an ADR in the US in 2007), but here is a nice way to diversify away from mining, banks, or oil which are the main avenues US investors can invest in Brazil. Now all the boiler plate issues about slowing global growth of course apply to Gafisa but with my vision of a very long term global commodity boom (with ebbs and flows of course as world economy strengthens and weakens), Brazil has a lot of opportunity in its emerging middle class.

Gafisa IPO'd last March in the $25 range, then quickly sprang to mid $30s. In this summer's credit crunch correction the stock lost all that gain, falling back to $23. Ouch. Since then it has had an epic run, rising to nearly $41. The stock has held up very well in the past few weeks, and I have been waiting for some weakness to begin a position - today it finally fell back to its 20 day moving average above $36 where I am beginning a starter position of 250 shares of $9.2K (0.8%) position. The next support level is down at $33, the 50 day moving average - so if the market continues to melt, this would be a logical next buying level.

The company is not cheap here, but has some serious growth engines as shown by its most recent earnings report on Nov 7, found here. Another company with great growth, sizable backlog, and pricing power. The market does not care about these things today, but eventually these type of things will matter again.
  • Net operating revenue for the third quarter, recognized by the Percentage of Completion ("PoC") method, increased 91% to R$309 million from R$162 million in the prior year period.
  • Backlog of Results to be recognized under the PoC method at the end of the third quarter reached R$465 million (Backlog margin of 38.5%), an increase of 60% from the previous year's quarter.
  • Project launches during the quarter totaled R$426 million, an increase of 119% over the same period in 2006. Pre-sales reached R$366.9 million, an increase of 56% over the 3Q06 pre-sales of R$235.3 million.
And again, the mortgage/credit industry is just in its infancy in many other countries so we get a chance to buy some companies akin to buying them here in the US in the 50s/60s/70s. With the dearth of ways to play the Brazilian market this is an attractive opportunity which has held up very well in the sell off (relative strength) and at market cap of just under $5 billion fits right in with the typical size holding in the fund.

I continue to position the fund into names holding up above their 50 day moving averages [Separating Chaffe from Wheat - the Selloff Identifies Future Winners], with the belief that if companies can hold important support levels in this mess of a market, one day when things return to somewhat normal, they should be the leaders on the way up.

Gafisa S.A. operates as a homebuilder in Brazil. The company also engages in the development of land subdivisions, commercial buildings, and entry-level housing. In addition, it provides construction services to third parties. Gafisa primarily develops residential buildings targeted at middle- and upper-income customers. As of October 26, 2007, it sold approximately 900 developments and constructed 37 million square meters. The company was founded in 1954 and is headquartered in Sao Paulo, Brazil.

Long Gafisa in fund; no personal position


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