Why Are Stocks of Brazilian Companies Struggling Today?

Following Our Lady of Aparecida Day celebration in Brazil yesterday, both the Brazilian real and stocks of companies headquartered in the country are losing ground today. The currency topped the list of biggest losers among the 16 major currencies as it fell by 1.7% against the dollar today, while the Ibovespa’s nine-day rally was halted today by a 2.5% slide of the index. The political standoff resulted in Standard & Poor lowering the country’s rating to ‘junk’ last month as forecasts of a long recession flood the market. Four companies reflected these tumultuous times by the losses that their stocks posted today. The reasons for the loss of investor confidence also have company specific components which we will explore in more detail. We will also take a closer look at the hedge fund sentiment towards these companies, in order to see if smart money is betting on a rebound of Brazilian stocks in the long-term.

First is the $45.53 billion São Paulo-based bank holding company Itau Unibanco Holding SA (ADR) (NYSE:ITUB) that was downgraded from ‘Neutral’ to ‘Underperform’ by Credit Suisse today. The stock slid by more than 5% in early trading, extending its losses for this year to more than 44%.

Among the funds that we track, Cliff Asness‘ AQR Capital Management is the largest shareholder of  Itau Unibanco Holding SA (ADR) (NYSE:ITUB) as it increased its stake by 3% during the second quarter to 10.32 million shares valued at $112.98 million. A number of Itau Unibanco Holding SA (ADR) (NYSE:ITUB)’s top investors that we track aggressively increased their exposure to the company during this period with high expectations of a rebound for the stock price. However, collectively, 23 funds from our database held only 0.80% of Itau Unibanco at the end of June.

In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8,000 funds in operation, we focus on the aristocrats of this group, which include around 700 funds. Contrary to popular belief, Insider Monkey’s research revealed that hedge funds have lagged in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to outperform the market on the long side of their portfolios. In fact, the 15 most popular small-cap stocks among hedge funds returned 102% since the end of August 2012 and beat the S&P 500 ETF (SPY) by 53 percentage points (see more details here).

Banco Bradesco SA (ADR) (NYSE:BBD) also experienced some bearish winds as its stock has slid by more than 5% so far. This year the stock slid by around 56%. Being one of the largest banks in Brazil in terms of assets is certainly hurting Bradesco, considering that the value of those assets have been in a tailspin recently owing to the country’s economic troubles. However, the stock’s high dividend yield of 5.61% coupled with a few other factors has made it a popular choice among professional money managers.

The elite hedge funds that we track were bullish on Banco Bradesco SA (ADR) (NYSE:BBD) during the second quarter as 15 had investments worth $210.64 million in the company at the end of June as compared to 13 funds with $176.62 million held in shares a quarter earlier. However, the concentration still only amounted to 0.5% of Banco Bradesco SA (ADR) (NYSE:BBD)’s total outstanding stock at the end of June.  AQR Capital Management and Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell are the two largest stockholders of Banco Bradesco SA (ADR) (NYSE:BBD) among the company’s investors that we track.

Next, we discuss the performances of one Brazil-based oil giant and the country’s mining company, which is undeterred by the sliding iron ore prices.

The $24.99 billion mining company, Vale SA (ADR) (NYSE:VALE), has one of the biggest iron ore expansion projects underway in the Para region of Brazil. However, given Goldman Sachs’ sullen forecast of iron ore prices on the heels of low demand, stronger greenback and the largest miners, including Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton Limited (ADR) (NYSE:BHP), escalating production guidance for 2016, has put Vale SA (ADR) (NYSE:VALE) in a tight spot as shown by the 6% fall in its stock price today.

A total of 22 investors, among over 700 that we track, were long Vale on June 30 as compared to 23 at the end of March, however, the value of their holdings increased to $303.46 million from $242.56 million and represented only 1% of the company. The stock price rose by a little over 3% during this period. Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital heads this list of investors with 17.48 million shares valued at $88.28 million reported in its latest 13F.

The recent surge of  Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR)‘s stock met a hiccup today as it was downgraded by Barclays to ‘Equal Weight’ from  ‘Overweight’, while the price target was lowered to $6.5 from $11. The stock slid by more than 5% in early trading, but had gained some ground in early afternoon.

The popularity of the Brazilian energy giant among hedge funds fell in the second quarter as only 31 held stocks in the company at the end of June as opposed to 35 at the end of March. The aggregate value of holdings held by the funds we track amounted to $760.56 million, equal to 1.30% of the company at the end of June.  Doug Silverman and Alexander Klabin‘s Senator Investment Group tops this list with 20 million shares.

Disclosure: None