Poster Board on Sentiment; A Contrarian Investor

I like to have a reference to refer back to a year or five years from now capturing certain points in time.   The market seems to be placing peak confidence in financial assets (stocks) vs. gold.

This post continues from a prior post: http://csinvesting.org/2016/11/17/when-no-one-wants-em-search-strategy/

The Bearish Gold Articles keep on coming:  http://www.businessinsider.com/heres-why-you-should-never-buy-and-hold-gold-2016-12

http://seekingalpha.com/article/4032167-gold-miners-perfect-bear-case

http://bloom.bg/2hWukKn Running out of metal.

Even bullish mining investors expect “waterfall declines” and gold going below $1,100. Momentum creates the news:  http://www.kitco.com/news/video/show/Gold–Silver-Outlook-2017/1456/2016-12-22/Mining-Stocks-Could-See-Waterfall-Declines—David-Erfle   To be fair, he is long-term bullish, but note the “certainty, inevitability” of gold falling in USD below $1,100 or even to $1,000.  Since he is probably considered strong hands (better capitalized with more experience in precious metals miners) his view indicates VERY bearish near-term (1 day to two/three months sentiment). As I interprete this news.

Financial risk is increasing on US company balance sheets, but then who cares while confidence is high?

As an investor, you want to monitor the amount of capital (especially in a capital intensive business!) going into and out of a business.   An industry starved of capital augurs well for future returns!

‘Anonymous Billionaire’ in the Spotlight After 1,000% Rally

  • Alaska fund is No.2 fund focused on Brazilian equities
  • Barros’s fund is now buying up Fibria, Marcopolo, Vale

Luiz Alves Paes de Barros is something of an enigma in Sao Paulo’s financial circles. At 69, he’s known around town as the “anonymous billionaire” for quietly amassing a fortune by wagering on stocks almost no one else seemed to want.

In Magazine Luiza SA, Barros may have made one of his best bets yet.

Starting in late 2015, Barros’s Alaska Investimentos Ltda. made the battered retailer one of its biggest holdings, a brazen move in a nation stuck in the middle of its worst recession in a century. It paid off. Magazine Luiza has surged more than 1,000 percent since reaching a record low about a year ago, making it the top stock in one of the world’s top-performing markets. That turned Alaska’s Black Master, which Barros co-manages with Henrique Bredda and Ney Miyamoto, into the No. 2 fund among 569 peers focused on Brazilian equities, according to data compiled by Bloomberg.

Barros’s latest success only adds to the intrigue surrounding one of Brazil’s most storied, but media-shy, individual investors. Early in his career, he traded commodities and was a partner of star fund manager Luis Stuhlberger at what is now Credit Suisse Hedging-Griffo. Barros then spent the next half century investing only his own cash, almost exclusively in Brazilian stocks, and regulatory filings show he personally holds 1.2 billion reais in equities.

When it comes to managing other people’s money, Barros is a rookie, having co-founded Alaska in July 2015. But his investing method remains the same. He only holds a handful of stocks, favors companies with bottom-of-the-barrel valuations and usually jumps in as everyone else is bailing.

“Perfecting patience is all I’ve done over the past 50 years,” Barros says. “I love when things get bad. When it’s bad, I buy.”

During two interviews, first in Alaska’s shoebox office in the heart of Sao Paulo’s financial district and then at his personal office on the city’s oldest business thoroughfare, the silver-haired asset manager explained what drew him to Magazine Luiza and went over the stocks he likes now: Fibria Celulose SA, Braskem SA, Marcopolo SA and Vale SA.

“The market has forgotten these stocks,” he says.

Alaska started building a stake in petrochemicals maker Braskem about four months ago (the stock has surged 48 percent since mid-August after tumbling 20 percent this year before then) and pulpmaker Fibria a few months later. Barros likes both companies because they’re fundamentally sound — and valuations are low. Braskem’s price-to-earnings ratio is 8.3, less than half the level three years ago. Fibria’s valuation is less than half the average of the past two years.Marcopolo, a maker of trucks and buses, is a play on Brazil’s rebound from recession, while miner Vale will benefit as global investors start seeking value again over safety. There’s no economic expansion in Brazil without infrastructure investments, he says.

“Vale won’t be a disaster for anyone. When iron-ore prices rise again, Vale will fly,” he said.

If those stocks return just a fraction of what Magazine Luiza did, they’d count as stellar investments. In all, Alaska acquired almost 40 percent of Magazine Luiza’s free-floating shares, regulatory filings show. In 2016’s third quarter, Alaska unloaded half its stake. What’s left of Alaska’s holdings in Magazine Luiza is now worth about 111 million reais ($33 million).

Asked how he knew Magazine Luiza would do as well as it did, he says he didn’t. “I just knew it was cheap.” The fact that the retailer of appliances and electronics had a market value of 180 million reais even though a bank had offered to pay 300 million reais for the right to offer extended guarantees on Magazine Luiza products made that clear.

“Either the bank was crazy or there was value there,” Barros says.

Alaska’s Black Master fund has returned 143 percent in 2016, compared with a 33 percent gain for Brazil’s benchmark Ibovespa stock index. The gains were also driven by a stake in Cia. de Saneamento do Parana, the water utility known as Sanepar that’s almost tripled this year.

Alaska is still a relatively small player in Brazil’s 2.38 trillion-real stock market. The asset manager employs 11 people (“That includes the lady who serves the coffee,” Barros says). While Alaska oversees about 1.6 billion reais, three-quarters of that is Barros’s own cash. But the fund is actively seeking new clients.

Why now, after 50 years of going it alone?

“Because I’m positive that the market is going to rise,” he says.

6 responses to “Poster Board on Sentiment; A Contrarian Investor

  1. I’m coming to the conclusion that industry experts and economists make useful contrarian indicators. When experts saying things like “and it’s going to go lower”, you should probably consider that the bottom will soon be in. I remember all the oil pundits predicting $29 per barrel of oil.

    They were actually right for a change. It turns out that they weren’t too pessimistic in this case. According to http://www.macrotrends.net/1369/crude-oil-price-history-chart, the price was $29.01 in Jan 2016. Good call! But instead of panicking, if you had bought BP a year ago, you’d be up 48%.

    Oil prices have recovered, of course. The problem with experts and economists, of course, is they weren’t predicting $29 per barrel when prices were $150, and I don’t recall them predicting a recovery to around $50, where it is today. I get the impression they were expecting a “permanently low plateau”.

    Around that time, there was also a lot of media attention around the desirability of “green” energy. This is especially inexplicable when you consider that the cheapness of oil makes these alternative forms of energy less desirable, not more desirable. Sometimes you just have to shake your head in disbelief and wonder what it is that everyone is talking about.

    In relation to gold: I have been following a company for a year called LON:PAF (Pan African Resources), which mines gold. Too bad I didn’t buy, as the shares are up 85% over a year.

    As a value investor, you may have a deep distrust of momentum, so it would be interesting to see what you make of it.

    Mining has had a good year if you had invested at the start. Over 5 years, it has been the worst. I think it’s an interesting idea: look for sectors that have been absolutely beaten up over the longer term (5 years), but have shown recover in the shorter term (1 year).

    I see you mentioned Brazil. I had not invested in it, but I did buy some shares in a Russian Investment Trust about a year ago. As memory serves, this was when Russia had frictions with Turkey. A site that you will undoubtedly find interesting is http://www.starcapital.de/research/stockmarketvaluation . It shows market valuations throughout the world.

    Russia is the cheapest, which is why I chose it over Brazil. I’ve gotten a good return out of Russia, and I still intend to hold on account of the fact that the valuation still looks good.

    Also interesting is that Emerging Europe is very cheap, too. I have some shares in BEE (Baring Emerging European) Investment Trust, which owns a combination of shares in Russia and Emerging European countries. So, fingers crossed.

    What’s also interesting about BEE, which is why I wanted to mention it specifically, is that it is undergoing a tender offer to try to reduce its discount to NAV. I was thinking of making a write-up of the process.

    One thing to note is that the shares are trading at about 18% discount to NAV, and the company wants to tender for 10% of the company shares at a discount of 2.5% of the NAV. So it will make an interesting special situation for me to talk about.

    On the face of it, it makes sense to tender the shares, as I get an immediate return in January. Whether it makes sense for some artitrager to do it would need discussion, as there are more variables involved.

    All the best for christmas, John and readers, and a prosperous new year to you all.

    • Thank and to you likewise. I will do a few posts on Contrary Thinking because the subject is more subtle than knee jerk leaning against the wind.

  2. I been buying some Junior miners and very bullish on one particular junior miner, Timmins Gold (TGD). It operates one gold mine and mine is cash flow positive. They also have one project with very high IRR whose feasibility study will be complete in Q1 2017. they also have good exploration locations.
    High shares count but balance sheet is strong( about 40 m cash) and the new management has turned the company around in 2016.
    I feel confident about the projects high IRR . check this site, he is well versed projects technical issues.
    http://angrygeologist.blogspot.com/2016/09/ana-paula-figures.html

    Would be great to hear your thoughts on Timmins Gold (TGD)

    • I would need to read all the filings/proxies, tech reports. I won’t get to it until Jan.

      However, junior miners are very speculative with HIGH operational and financial risk. Make sure the mgt is the best in the business for their type of property. So regaqrdless of anyone’s opinion, size accordingly.

  3. dear sir,

    I had posted a comment few days back regarding a junior gold miner and was hoping to read your thoughts. The miner is Timmis Gold (TGD). I am a shareholder and their mine and projects seems good. I also gave you a link to angry geologist review of their upcoming project. would love to hear your thoughts.

    thank you

  4. Thank you

    I was thinking if you can help me value a gold project. The company I talked TGD has market cap of 116 million. Cash of about 40 million, one producing mine with cash flow positive and another is a project going to permitting process. The PEA on the project states that IRR is over 30% after tax at 5% discount rate. The project itself is good but how would i value the project with 8% discount rate. I haven’t done any kind of valuation till now but if i were to , what are the ways to value it. trying to learn how to value a gold mine.

    BTW, The management is good, In 2016, the company went from brink of bankruptcy under old ceo to having 40 million in balance sheet.

    thank you.

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