For every action, there is an equal and opposite reaction.
Newton’s third law applied to forces acting on two objects … but it may as well have been talking about stock markets.
The U.S. economy is strong, but that’s not great for some.
You see, U.S. dollar strength has hurt many global stock indices. Last week, U.S. Federal Reserve Chairman Jerome Powell said he may raise the fed funds rate four times this year. The market was planning on three.
Banks increase their interest rates after the Fed raises its rates. And higher rates are good for the dollar. They make savings accounts more attractive to customers.
But a stronger dollar can be bad for other countries.
Brazil is taking a beating right now. Brazil’s currency, the real, has fallen to two-year lows against the dollar … and taken stocks with it. Its stock market is down 18% over the past month.
It’s a perfect storm for one Brazilian company I follow. Its stock price has been falling for a while, but there are now more reasons for hope…
Currency Exposure
BRF (NYSE: BRFS) isn’t a household name for many folks in the world. But it’s a big deal in Brazil.
This is a speculative trade … but one that could easily double from today’s levels over the next 18 to 24 months.
The company has been trying to turn itself around for a while now.
And the recent currency weakness has been a double whammy on the stock.
The market worries the U.S. dollar debt the company owes will become costlier.
But I don’t.
Management has a laser-like focus on BRF’s currency exposure. I know the company’s former CEO, so I like to keep tabs on this.
BRF is one of the largest food makers in Brazil … and the world. It had more than $10 billion of sales last year to more than 150 countries.
Changes in more than a dozen currencies affect BRF’s finances. But this is OK. It exported more than half its sales outside of Brazil last year. BRF owes money — and customers owe it money — in many currencies. This creates natural hedges.
In the case of the dollar, for example, BRF benefits when its home currency weakens. Its bond repayments increase, but that cost is more than offset by the value of its exports.
This Turnaround Is Taking a While
Management has been trying to turn the company around. It hasn’t been easy.
However, there is hope. BRF was recently able to land the exec it wanted. It hired the recently-departed head of oil giant Petrobras (NYSE: PBR), Pedro Parente.
Brazilians respect Parente due to the solid job he did there. He turned the country’s largest energy firm around despite the debt, corruption and mismanagement he inherited.
Financial markets praised him. He sold assets, reduced costs, recovered cash flow and implemented a profitable new fuel-price policy. In the first quarter, the firm posted its largest profit in five years. (Shares have fallen since due to a nationwide strike truckers blamed on high energy prices. And Parente’s departure.)
His work at BRF will be similar in many ways. The firm needs to rein in its debt and fix food safety (Europe) and tariff issues (China). He’ll likely sell some assets to pay down debt, too.
Parente has what it takes for the role. He is a former government minister. He was also the head of the Brazilian arm of U.S.-based ag giant Bunge Ltd. (NYSE: BG). His experience with government and the food industry will serve him well at BRF.
Insider Buying
I’m interested in another aspect as well. Insiders have recently been buying shares.
Since March, we’ve seen an undisclosed insider buy nearly $2.3 million of them. This stock doesn’t see insider buying very often:
(Source: Bloomberg)
The green symbols above represent insider buying.
We haven’t seen any insider selling. And two pension funds that control 22% of the company’s shares don’t plan to do so anytime soon. They both said they’ll wait for prices to move higher before even thinking about it.
At least some of the recent purchases coincide with the timing of Parente joining the company. He joined the board in April, and just accepted the CEO role in mid-June.
Global Food Giant
Shares have kept falling with the recent weakness, though. Today, we can buy for even less than they paid. Shares have begun to flatten with Parente’s hire, but they haven’t confirmed an uptrend yet.
I’d like to see them rise above their 50-day moving average near $6.50 to do so. That’s about a dollar higher than the current price, but the sky’s the limit once that happens. You can see shares traded above $15 this past October. And above $25 less than four years ago.
There are issues to fix. And it’ll take some time. But we can benefit by buying into this global food giant when the rest of the world hates it.
Good investing,
Brian Christopher
Senior Analyst, Banyan Hill Publishing
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