Brazil’s Hottest Stock Mixes Turnaround and Mom-And-Pop Boom

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Brazil’s Hottest Stock Mixes Turnaround and Mom-And-Pop Boom
Credit: © Reuters.

(Bloomberg) -- There’s a rising star in the record-breaking Brazil rally.

Shares of retailer Via Varejo SA have surged 156% since the beginning of the year, more than doubling in value since June 14, when a group of funds partnered with retail mogul Michael Klein to buy the firm’s shares at the auction of a stake owned by Casino’s Brazil subsidiary Cia Brasileira de Distribuicao, known as GPA.

The new owners rushed to replace management, which moved quickly to turn around the business, installing 8,000 new computers in stores in five months and getting the firm’s e-commerce platform in good shape in time for Black Friday. The payoff came in the form of record 1.1 billion reais ($271 million) in 24-hour sales and no crashes, in what Chief Executive Officer Roberto Fulcherberguer called “the ultimate retail stress test” in a meeting with investors on Tuesday.

“We didn’t know if he had teeth before Black Friday,” he joked on stage referring to Helisson Lemos, a former MercadoLibre (NASDAQ: MELI ) Inc. vice president, and current chief digital officer at Via Varejo. “He never laughed and only started making jokes when Black Friday was over.”

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Via Varejo’s rally is also tied to the rising number of retail investors in Latin America’s largest economy. The stock, which is Brazil’s most traded over the past 20 days, saw the number of individuals in its shareholder structure increase, according to Chief Financial Officer Orivaldo Padilha.

“We’ve seen a jump, and it’s now a relevant number,” Padilha said in an interview in the sidelines of the Tuesday meeting in Sao Paulo, declining to give details on the stake these investors now represent. “It’s a new reality. We’re very happy to be able to attract these new investors to our shareholder base.”

Via Varejo retail investors increased twenty-fold since 2017 and the company is considering creating a division in its investor relations department focused on individual investors, according to a person close to the discussions who didn’t want to be named because plans are not public yet.

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The move is not restricted to Via Varejo: Record low interest rates have caused a massive shift in how Brazilians allocate their assets. Investors are poring through research reports, piling into hot stocks and dabbling in high-yield bonds. With foreign investors still mostly on the sidelines, it’s the locals that have sent the Ibovespa stock benchmark to unprecedented levels.

The stock abruptly slumped twice in the past month after filings about an internal fraud investigation. The drops were momentary though, as investors tied it to the practices of the firm’s former management. In the last month alone, Via Varejo is up more than 48%, the best performance on the Ibovespa , making it one of the top three for the year.

The impact of the frauds -- which are still under investigation -- are estimated at as much as 900 million reais in the fourth quarter and are allegedly related to middle management, Padilha told investors. The impact may be mitigated throughout 2020 with expected tax credits and should end up in as much as 500 million reais, he said.

Analysts see more upside for the stock, which has nine buy recommendations, six holds and only one sell, according to data compiled by Bloomberg. Itau BBA and Eleven Financial Research boosted their price target for Via Varejo after the investor’s meeting, mentioning the management progress so far and 2020 guidance.

“We left the event with the feeling that change is kicking in at Via Varejo,” Itau BBA analysts led by Thiago Macruz said in a Dec. 17 report.

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