“Brazilian Earnings Surprise Coming — Oct. 25”

By Travis Johnson, Stock Gumshoe, October 16, 2007

This email came in today from Mark Skousen, and since it’s a quick and dirty one I thought I’d throw it into the mix for y’all.

Skousen’s Hedge Fund Trader, which is what’s being advertised here, is predicting that this Brazilian company will report earnings on October 25 and blow the market away.

Now, before you get too excited, let me remind you: Skousen does not have a crystal ball. He has tried this before in his ads, so the ads must be working, but the predictions are somewhat less certain. Last time he predicted an earnings blowout and urged you to get in before those earnings was when he predicted an “electrifying boost” for ABB on their July earnings a few weeks before those earnings came out.

What happened? ABB was essentially in line with their earnings, as far as I could tell, and the shares were largely unchanged — technically, the shares fell between when I saw that email ad and the day after earnings, though they moved around enough that you could have certainly bought or sold at $24 or less at any time for several weeks. In the past few weeks they have shot up a bit, perhaps on expectations of the next earnings beat, or because Skousen and others are again touting the name as a play on some big China contracts. I might get around to writing about that later.

But for now, we’ve got another prediction of an earnings beat from Skousen — does the fact that he wasn’t particularly prescient last time mean he’s more or less likely to get it right this time? Probably not, as far as I’m concerned predicting earnings blowouts — and, more importantly, predicting market reaction to those blowouts — is a losing game.

There’s no predictable way for you to be right more than half the time in making predictions like this, and even that is giving yourself a lot of credit for a prescience that the best investors in the world rarely exhibit on a short term basis. Even if a particular company does have earnings that “beat the street” or beat the “whisper” numbers, the shares may have already run up to reflect that expectation … and if the foreward projections or estimates by the company don’t meet expectations, even a huge beat might bring the shares down. There are too many unknowables.

But of course, we’re going to try to figure out what Skousen’s company is, anyway. Knowledge is power, after all.

So what are we told? Quite a bit, actually:

This is a Brazilian company that owns railroads, marine terminals, and hydroelectric power plants … but more importantly, it’s one of the biggest metals and mining firms in the world.

They’ve got operations primarily in Brazil, but also in Mozambique, Argentina and elsewhere.

They trade at a forward PE of 13, trailing PE of 17. Skousen calls that cheap, though keep in mind that all things are relative — a mining company at those ratios three years ago would have been wildly expensive.

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Quarterly revenue growth is 82%, which is why that PE currently looks cheap.

So what are we dealing with? Which Brazilian mining company is going to report on October 25 and wow us?

Gotta be Companhia Vale do Rio Doce (RIO)

This is certainly one of the biggest iron ore and related steel-ingredients miners in the world, with good footholds in a lot of other commodities, and they’ve certainly had remarkable growth. Will they beat on their next earnings release? Who knows — but do note that the stock has been a favorite of advisers for a long time, and has been pushed by the likes of Robert Hsu for a while, too. It has already climbed more than 30% in the last month (though it’s down close to 5% today). The market is expecting great things.

The earnings are being released on October 25, and their PE has actually dropped slightly since Skousen penned his ad at their recent highs — the forward PE is down to 12.5 now, and the trailing PE is in the 16s. That’s pretty comparable to the other big mining companies.

Sooooo — a commodities company, in a booming market for iron ore thanks to China, and a beat on earnings … seems like a safe bet, right? Well, only if you’re really convinced that you’re smarter than the analysts, and that the market will act like you think it should in the short term. The shares are at $33 and change now, down from their briefly held 52 week high at about $36, but they’ve also been downgraded this month at least once … and remember, on September 13, when it was probably equally clear that the earnings this quarter would be great, the shares were down at $27.50.

Brazil has been a wildly successful place to invest, as have commodity companies of all stripes — but do note, going forward, that many of RIOs expenses are in comparatively valuable Brazilian Real, while much of their income probably comes in in weaker dollars. As US investors in the ADR, we still enjoy the currency benefits of owning something in Brazil, but those benefits might be offset because of the business they’re in — just another minor input for your personal calculus.

Can’t argue that CVRD is a bad company, or that they are in a bad spot, but I also can’t feel comfortable assuming that they will beat analyst estimates handily and see a big share price spike because of it. One positive contrarian indicator, if you want to call it that, is that the analyst estimates for this quarter have come down slightly in the last month or two, so a beat might be somewhat easier … assuming, of course, that the analyst(s) didn’t know what they were doing when they lowered estimates.

Good luck to you, let us know if you’ve got a RIO crystal ball … that would really come in handy here at Gumshoe headquarters.