Bill Mann “Great Argentine Land Grab”

By Travis Johnson, Stock Gumshoe, March 9, 2008

This is another teaser-within-a-teaser, part of a loooong advertising email from the Motley Fool’s Global Gains newsletter. This is a relatively new service (last couple years) that’s trying to capitalize on Americans’ obsession with overseas investments, they focus on companies that are easily tradeable in the U.S., either as listed ADRs or with heavy pink sheets volume.

And this email ad included some of the old teasers we’ve seen from Global Gains before, if you’re interested in those. That would be their No. 1 Pick for New Money Now, which is the same as it was in August, and their other “tier two monster” stock, which likewise is the same as it was six months ago (the first one, an Indian bank, had a good run but has come down to close to that August buy point, the second one, a Chinese motel company, has fallen about 25% since August).

But now we’re adding some more ideas to the mix — here’s an excerpt from the ad:

“The great Argentine land grab: The one company that owns the development rights to the only remaining parcel of land in the exclusive Puerto Madero neighborhood of Buenos Aires. Nestled between the beautiful La Plata River and a protected nature reserve, virtually any development the company puts there will soon be in hot demand.”

“The company also owns some of the country’s most attractive office buildings, shopping malls, and hotels. As the market takes off, this company can profit through operations or sell off these appreciating assets, using its investing smarts to deploy newfound cash reserves in ever more profitable ways. This is your chance to cash in on the great Argentine land grab — but you have to move on it soon.”

Since we’re talking about an Argentine land company, in my opinion there are really only two good options that are easily tradeable for US investors, Cresud (CRESY) and IRSA Investments and Representations (IRS).

This particular teaser, however, is definitely for IRSA. The company is a real estate developer in Argentina — which, in case your last memory of Argentina on the news is of the riots and looting that accompanied their most recent financial crisis, about six years ago, has actually been doing pretty well more recently. In the shadow of Brazil, Argentina is quietly growing at 6 or 7% and seems to have gotten some control over inflation, and several companies there are looking pretty promising (including the very richly valued MercadoLibre, Latin America’s answer to ebay, which is also partly owned by ebay).

I guess it takes a foreign company to have the gumption to choose “IRS” as their ticker symbol, eh?

IRSA does indeed own that one big undeveloped plot of land in Buenos Aires, and I think they own many of the popular shopping malls in the country as well as plenty of standard office buildings and the like.

Cresud, just as a by-the-by, is more of an agricultural play — they also own tons of land in Argentina, but it’s primarily farmland. That’s likely to be the reason that although both of these companies have fallen significantly from their November highs, CRESY has fallen less far — the agricultural bull market is alive and well, and they appear to be profiting nicely.

Neither Cresud nor IRSA is cheap on earnings, but in both cases it would probably behoove you to get into their filings and see exactly how they’re valuing their land. If they don’t mark to market, and very few real estate or land-owning companies do, then they’re likely to be sitting on some huge unrealized real estate valuation gains (depending on when they bought the land). That’s not to say they’ll ever realize those gains, or that it will benefit your portfolio if they do, but it is a fairly good guess that their book values are significantly understated just by nature of the businesses they’re in.

Estimates for IRSA have come down over the last couple months, along with the share price, and the analysts have shown no particular accuracy in their estimates so far, but at the current projections they have a forward PE of 15. Both of these companies are trading at trailing PEs in the mid-30s, which is steep for a real estate company … but growth has been very good of late.

So … it’s easy to see both sides on IRS — is it a bargain with undeveloped land that will reap billions for them, or is it an overpriced real estate developer in a country that still causes international creditors to scowl in memory of 2002?

The macro question, as I see it, is whether you believe that the natural resources boom, including both metals and agriculture, is going to bust — if it does, it will very likely bring Argentina’s economy down with it (like much of booming Latin America, they have copper, gold and agricultural products to thank for their bulging government coffers and their recent popularity among investors).

Argentina in the 1990s seemed a brilliant investment, returning to near-parity with the “developed” world (in terms of gdp per capita, etc) and booming on the international scene … but when their crisis came and the currency was devalued amid hyper inflation everyone got hit hard. IRS peaked at over $30 a share in the late 1990s, but fell dramatically in the financial crisis and got down to near $3 a share … it has spent a few years climbing back, along with the Argentine economy, and now stands at about $13 a share (it got up over $20 last fall).

I don’t mean to speak ill of IRS (or even our IRS, since I’ve yet to sit down and suffer through my tax returns), just to give some perspective on the country and point to a few things you might want to research if you’re interested in investing.

I agree that what IRSA is holding seems very compelling, and it may be worth a look if you believe the commodity boom will continue to bring riches to Argentina, Brazil and their neighbors. Personally, I’d probably concur … but it’s also sometimes very hard to tell a bubble from a sustainable bull market. What do you think?

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