Investing in the stock market in Brazil has proven to be a challenge for the strong-willed. Recession, political uncertainties, vulnerabilities to any oscillation in the U.S. and China, and fear of the effects of a trade war between the world’s biggest powers are just some of the factors of instability for Brazil’s stock market. But while the overall performance of publicly traded shares in São Paulo is not jaw-dropping, some companies managed to stand out regardless of the negative trend.
A study by The Boston Consulting Group (first revealed by Exame) shows which are these companies and, more importantly, what allowed them to perform so well in an environment that has been anything but favorable. The data could help investors find shares that could grow in a more sustainable manner in the medium and long-term. The study has been carried out for the past 20 years and calculates the annual performance of stocks – including what has been distributed to shareholders through dividends.
The 2018 edition of the study analyzed 60 companies listed on Ibovespa, the São Paulo stock market index, between 2013 and 2017, a period during which Brazil experienced its worst recession on record. Over that span, companies listed on B3 earned, on average, 9 percent a year. Meanwhile, the return of the top 10 most profitable securities of Ibovespa earned their shareholders 29 percent.
Here is the list of the best-performing shares between 2013 and 2017:
Profits and growth
The annual return these companies generated varies from 48 percent, in the case of Magazine Luiza, to Kroton’s 29 percent. These companies managed to increase their revenue and profits in a lucrative manner. Several pieces of research show that most companies either expand or increase their profitability – but rarely do both at the same time.
There are many cases of botched mergers and acquisitions, such as the marriage between Germany’s Daimler and America’s Chrysler. The merger was undone in 2007, after nine years, when the companies said that problems with corporate culture led to losses in market share.
Other companies chose a more conservative approach, deciding to distribute bonuses to shareholders instead of reinvesting in the business. This was the case of several companies operating public concessions, such as electricity and public sanitation. While that pays more in the short-term, reinjecting money into the operation can bear fruit in the long haul. Equatorial is an example of such a strategy.
The company had an aggressive M&A approach, taking over problematic power companies such as Cemar (a power distributor in Maranhão), and Celpa (in Pará) – and restructuring their operations. In five years, the group’s revenue jumped by 200 percent to BRL 9 billion. Its stock had an annual gain of 31 percent.
Kroton is another company that relies heavily on acquisitions – to the point that some of its deals were blocked by Brazil’s antitrust watchdog Cade for risks of creating a monopoly. Over the past decade, Kroton bought out almost 30 competitors and became one of the world’s biggest players in the education field, with more than 1 million students. Last year, though, Cade blocked the take over of Estácio, Brazil’s second-largest educational group. The BRL 5.5 billion deal would have created a BRL 25 billion behemoth with over 1.6 million students, dominating 46 percent of Brazil’s distance learning market and 17 percent of face-to-face education.
Escaping Operation Car Wash
A curious case is that of petrochemical company Braskem, which is partially owned by the Odebrecht construction group – perhaps the company worst-affected by the Operation Car Wash scandal, which unveiled a deep corruption scheme in Petrobras and many other public institutions. The group went through a rough patch, having its CEO imprisoned and the company’s name becoming a synonym for corruption.
Braskem, however, remained strong – thanks in most part to heavy investments in increasing production. The company inaugurated units in the U.S. and Mexico between 2014 and 2017, anticipating the growing demand for plastics and resins abroad, especially from China.
Since the first semester, Odebrecht has been in talks with the Netherlands’ LyondellBasell, which earns USD 34 billion worldwide and owns a plastic plant in São Paulo’s countryside. A deal could be announced soon, as the Dutch company has already carried out a comprehensive business appraisal on Braskem. A deal would only increase the company’s value.
But before going on a buying spree on the stock market, it is necessary to perform one’s due diligence. After all, a new administration takes over in 2019 – and changes in the economy could take down some of these champions – and new ones are likely to emerge.