Manager: Andy Djordjalian
Model: South America
Andy Djordjalian is a private investor living in Buenos Aires, Argentina. He manages Covestor’s South America model, which diversifies across South American countries, asset classes and industries. He recently purchased Gafisa SA (NYSE: GFA) for the model, so we asked Andy to share his investment thesis with us. His response follows.
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Gafisa (GFA) is a well-respected Brazilian homebuilder focused in the mid-to-higher income market but with significant efforts in the affordable segment as well. Housing in Brazil is a thriving industry, and I believe Gafisa is showing signs of becoming an prominent platform as it scales up on its traditional strengths.
Still, a good company means a good stock only if its shares are priced attractively. It is not easy to value Gafisa because it has grown very quickly in recent years and its industry is speculative and financially complex. Nevertheless, in my opinion, its performance and future opportunities deserve a higher valuation. Relative to earnings and book value it looks remarkably cheap. Cash flow doesn’t look good at first sight (actually it’s negative as of 5/1/11), but this ‘cash burn’ is justified by high growth — among other uses for this money, the company has been hoarding land for future developments.
It would be of some concern if they ran out of cash, but it looks like they will be reversing their negative cash flow in the second half of the year and their current cash position is comfortable enough to sustain them until then. Still, real estate is a speculative market, we don’t know for certain where it is headed, so there are risks. But I think that, at the current price of Gafisa, these compare well to the upside potential. Real estate in Brazil might be somewhat expensive but it doesn’t look too much so. Besides, construction costs haven’t risen nearly as much, therefore it wouldn’t be disastrous if there was a price correction.
I would be comfortable buying GFA now for the long term but, as speculative as it is, it is also an attractive stock to play the market. I purchased it on June 1 last year, sold that position on July 22, and now repurchased at a price that is considerably lower than in July and, particularly, than the stock’s highs of early November 2010. When I sold last year, I was expecting some short-term pressure due to macroeconomic factors, like housing being impacted by the tightening of credit performed to curb rising inflation in the country. But I feel that the drop in share price has been exaggerated, more so considering that the homebuilding industry has shown resilience and that the government is not demonstrating a will to tighten credit at any cost, they will rather coexist with some inflation temporarily.
This week, the company announced discouraging earnings for the first quarter and the departure of their CEO. They anticipated both in March, explaining that earnings were affected by delays in the delivery of some high-margin projects, so these weak earnings for the quarter haven’t changed their positive guidance for 2011. I’m also not too concerned about the CEO change, at least not as much as to justify the drop GFA experienced since. Actually, the stock surged in the week following the announcement that the CEO was resigning before the end of 2011 but staying in the board, only to drop after that, which shows fickleness in some shareholders, and I find that to be a hint of opportunity.
I’m expecting a strong third quarter, but I bought now because I don’t want to miss it if the market acts in anticipation, as it frequently does. Besides, I wanted to add some high-beta shares to my portfolio.
