Brazil Retail and International Value from Sahm Adrangi, Kerrisdale Capital

Notes from the Value Investing Congress

By, September 8, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Sahm Adrangi is a relatively new guy to the value investing world, Kerrisdale Capital is about five years old and (unlike many) they share their research — particularly on their short ideas (like Citron or Muddy Waters do), though they’re not always as confrontational as those guys (at least when it comes to language).

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He’s best known for looking at the China frauds a few years ago, but he gave a good short argument for BOFI at the last Congress, in las Vegas back in April… today he’s got a long idea to share.

Argument that there’s more opportunity in international markets, which have stalled during the US bull run. Valuations substantially lower, Hang Seng trailing PE at 9.5X; Brazil has a PE of 10, Russian MICEX has a PE of about 7. Russia is his favorite market because of the fear, he thinks we’ll have a sharp and shocking rally at some point in the next couple years (his favorite stock and one of their top five holdings is dominant Russian bank Sberbank at a 5.4 PE and 0.9X TBV and net interest margin twice the US, SBER in London), but the stock he’s talking about today is in Brazil.

Discounts are caused by worries about China (for neighbors or commodity exporters), US interest rates are hurting current-account-deficit countries like Rukey, India, Brazil, Indonesia, South Africa; and Europe is discounted largely because of structural leverage and low growth.

Fundamental takeaway is that cheap valuations for broad market indexes in these countries mean that there are good, cheap stocks inside those indexes that are probably better off than average.

“Because of these macro concerns, attractive businesses with strong growth trends and abilities to reinvest capital at high rates over the long term can be found at attractive multiples”

A theme that lots of other value investors agree with.

He also noted that UK-listed real estate brokers trade at half the multiples of US brokers.

His idea: Via Varejo (VVAR11 or VVAR3 on the Bovespa), Brazil’s largest electronics retailer, also leads in appliances and furniture. A play on rising middle class — Casas Bahia, Ponto Frio are the brands — they’re spinning ...

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