Exploring Investment Opportunities in the Brazilian Stock Market: Insights from Rafael Ragazi

The live session begins with Rafael Ragazi discussing the current market sentiment, noting that many investors are feeling depressed and disinterested in stocks. Despite this pessimism, Ragazi emphasizes the importance of focusing on both macroeconomic factors and microeconomic results, which are currently diverging in Brazil.

Ragazi explains that the macroeconomic environment is concerning, particularly regarding fiscal issues, leading to a lack of optimism among investors. In contrast, the microeconomic landscape, which includes company performance and results, is showing improvement, with many companies exceeding market expectations in recent quarters.

He highlights that over the past few trimesters, the percentage of companies reporting results below expectations is decreasing, while those exceeding expectations is increasing. Analysts are continuously updating their projections upwards, yet companies keep delivering even better results, creating a cycle of positive surprises.

Despite the improving earnings and increasing profits, many stocks are not reflecting this growth, with some even declining. Ragazi points out that this discrepancy has led to low valuation multiples for several companies, creating potential investment opportunities that seem irrational given their strong growth prospects.

The session is interactive, with Ragazi indicating that they will provide stock recommendations during the live discussion. He encourages viewers to engage by liking the stream and sharing their locations, fostering a community atmosphere while discussing financial education.

Ragazi discusses the influence of fixed income on the stock market, stating that rising interest rates typically lead investors to sell stocks in favor of safer fixed income investments. He notes that many funds, including institutional and pension funds, are currently withdrawing from equities and opting for fixed income options like PCA + 7, which offer lower risk.

As a result of the shift towards fixed income, quality stocks that demonstrate strong earnings and results are being overlooked and neglected in the market. Ragazi emphasizes that this presents a unique opportunity for investors to capitalize on undervalued stocks.

The speaker discusses the potential to multiply one's wealth by five times, emphasizing that such opportunities arise when stocks are undervalued and no one is interested in buying. However, this requires a willingness to take risks and patience, as significant returns typically materialize over several years rather than months.

In the short term, stock market performance is influenced by various factors beyond company results, including interest rates in Brazil, which can reach 14-15%. This leads many investors to prefer fixed income investments that promise capital multiplication without risk, such as IPCA plus seven. However, over the long term, there is a strong correlation between company profits and stock prices, which becomes evident when analyzing data over extended periods.

The speaker suggests that a minimum investment horizon for growth stocks should be around five years. This timeframe respects the business cycles and the time required for companies to implement strategic plans and see results. Additionally, market cycles, which historically last about five years, also play a crucial role in investment outcomes.

Addressing a question about the risks of investing now, the speaker clarifies that the primary risk is a decline in stock prices, which is distinct from a drop in company profits. While analysts can predict profit increases, they cannot guarantee price rises. If a company's performance improves but its stock price falls, it presents an opportunity to buy quality companies at lower prices, which is why the speaker favors growth stocks.

The speaker explains that for growth stocks to experience significant price movements, a 'trigger' is often necessary. This could be a market cycle change, a merger announcement, or a successful recovery plan. In the case of growth stocks, the growth in results itself acts as a trigger, although it may not be immediate. The key question remains when this growth will manifest.

The discussion begins with a hypothetical scenario where a company is trading at 10 times its earnings. After a year, if the company's profits double but the stock price remains stagnant, the valuation drops to 5 times earnings. This situation illustrates how prolonged low multiples can create compelling investment opportunities, prompting companies to buy back their shares as their market cap decreases. The speaker emphasizes that the primary trigger for investment decisions is the company's performance, which can lead to a reversal in stock price trends when earnings improve.

The speaker notes that many companies have shown improved results over the past several quarters, yet their stock prices have not reflected this growth, leading to undervaluation. This includes a variety of companies, from lesser-known firms to popular stocks that have faced temporary pessimism. While acknowledging the uncertainty of short-term price movements, the speaker expresses confidence in the long-term potential of these undervalued stocks, driven by improving fundamentals.

The conversation shifts to the current market environment, where growth stocks are being penalized due to their future earnings potential being discounted at higher interest rates. The speaker explains that the market is currently less willing to invest in companies that promise future growth but are not delivering immediate results. This has led to a preference for dividend-paying stocks, which are typically more stable and predictable, as investors seek safer investments during uncertain times.

Despite the prevailing market sentiment favoring mature companies with stable earnings, the speaker argues that certain growth stocks that are beginning to show positive changes in their financials should not be overlooked. The discussion highlights the importance of identifying growth companies that are on the verge of a turnaround, as these stocks may present significant short-term investment opportunities. The speaker suggests that if investors can pinpoint companies with improving fundamentals, they may benefit from potential price increases.

As a specific example, the speaker references the Banco Inter, which was discussed a year or two ago. This example serves to illustrate the broader point about identifying companies that are positioned for growth despite current market challenges. The speaker encourages viewers to consider such opportunities as they may lead to favorable investment outcomes.

The speaker discusses Banco Inter, a bank from Minas Gerais, highlighting its regional significance and transformation from a financial institution to a comprehensive digital bank. They mention the bank's significant digitalization efforts, including the development of a Super App, and its current status as a well-rounded financial entity with investments both domestically and internationally.

The speaker notes that Banco Inter's stock suffered when interest rates rose, reaching a low point on March 23, 2023. At its lowest, the stock value dropped significantly, but it has since multiplied by five, currently valued at approximately 15 billion BRL, compared to its IPO valuation in 2019, which was around 3 billion BRL.

The speaker reflects on a presentation made to a select group of qualified investors at the 'Clube Norde' during the stock's low point, emphasizing the opportunity to invest in Banco Inter. They recount how the stock subsequently multiplied by five, illustrating the potential for significant returns even in challenging economic conditions.

The discussion shifts to identifying the next potential success story similar to Banco Inter. The speaker mentions a recent event where they discussed another stock that might experience a similar turnaround, emphasizing the importance of clear indicators of improvement for market recognition. They caution that while there is potential for high returns, it is not a guaranteed promise.

The speaker provides a brief history of Banco Inter, noting its origins as a financial institution supporting MRV's financing needs. In 2015, it transitioned to become Brazil's first digital bank, offering free accounts, thus pioneering the digital banking movement in the country.

The discussion begins with the banking revolution, highlighting the emergence of digital banking alongside Nubank, which was founded in 2013. The speaker notes that while Nubank capitalized on a favorable investment climate, Inter adopted a more conservative growth strategy, avoiding the common practice of burning cash and accumulating losses typical of many growth companies.

Inter's approach from 2015 to 2022 involved balancing growth with profitability, achieving a break-even point rather than incurring losses. This conservative management style is seen as a significant differentiator, allowing Inter to maintain a steady growth trajectory while generating results. By the end of 2022, Inter set an ambitious guidance of reaching 5 billion in profit by 2027, which initially met skepticism from the market.

In recent quarters, Inter demonstrated substantial growth, reporting a return on equity (ROE) of 12%, a notable achievement for banks. The company's goal is to reach a 30% ROE, indicating significant potential for future growth. The speaker emphasizes that achieving a 12% ROE is a milestone that many companies struggle to attain throughout their existence.

The market's perception of Inter improved over the past year, particularly following a revision of its financial outlook, which led to a fivefold increase in its stock price. The speaker believes that Inter still has the potential to multiply its value by five, given its current market valuation of 15 billion and the projected 5 billion profit, suggesting a future valuation of 75 billion if it trades at a historical multiple of 15 times earnings.

The speaker compares Inter with Nubank, noting the stark difference in market valuations—Nubank was valued at 400 billion recently, making it the second most valuable company in Brazil after Petrobras. Despite Nubank's impressive growth, Inter's profit growth of 150% in the last quarter outpaced Nubank's 89%, and the visibility of Inter's growth trajectory is perceived to be much clearer than that of Nubank.

Nubank has reached 99 million clients in Brazil, matching the largest banks like Itaú. This saturation indicates limited room for further client base expansion in Brazil, raising questions about how Nubank and its competitor, Inter, will grow their results. The discussion highlights the importance of monetizing their existing customer base while also considering international expansion into countries like Colombia and Mexico, with potential plans for Argentina. However, the speaker notes that international expansion carries higher risks and complexities due to varying regulations and market dynamics.

Inter's growth strategy focuses primarily on the Brazilian market, aiming to increase its client base from 35 million to 60 million without relying heavily on international markets. The CEO's comments suggest that while international expansion is an option, it is not essential for achieving their growth targets. The company plans to leverage its existing resources in Brazil, indicating a more stable approach compared to Nubank, which faces greater uncertainty in its growth trajectory.

Nubank's credit portfolio is characterized as aggressive, primarily consisting of personal loans and credit cards, which inherently carry higher default risks. The speaker expresses concern over Nubank's increasing delinquency rates, contrasting with Inter's improving figures. Notably, Nubank is not provisioning for potential losses at the same rate as its rising delinquency, which could lead to future financial surprises. In comparison, Inter's portfolio is more secure, with 70% of its loans being collateralized, including real estate financing and payroll loans.

Despite Nubank's size, the speaker argues that it should not solely focus on international expansion but continue to capitalize on its Brazilian market presence, similar to Itaú. The expectation is that Nubank will increasingly generate revenue as its customer relationships mature, leading to higher average revenue per client. The discussion also touches on Nubank's initial target demographic, which skews towards lower-income clients, contrasting with Itaú's broader market appeal, including high-income clients.

The speaker expresses skepticism about Nubank's ability to reach the same level of client profitability as Itaú, noting that Nubank's customers are primarily attracted by the absence of fees and services, while Itaú's clients seek advanced services and technology. This fundamental difference in customer profiles suggests that Itaú will consistently achieve higher average revenue per client compared to Nubank.

Nubank's growth strategy has focused on attracting unbanked individuals, contrasting with Inter's approach of targeting customers already with other banks who are drawn to Inter's service portfolio and lower prices. The speaker highlights that this difference in customer acquisition strategies complicates direct comparisons of average revenue per client between the two banks.

Despite Nubank's lower average revenue per client, it boasts a higher return on equity (ROE) than Itaú. This is attributed to Nubank's digital-only model, which eliminates the costs associated with physical branches, such as rent and personnel expenses. The speaker emphasizes that Nubank's low-cost structure allows it to maintain higher profitability even with lower revenue.

For Nubank to sustain its growth trajectory, the speaker suggests that it must pursue international expansion. As customer relationships mature, Nubank can leverage operational leverage to increase profitability per client. However, there is a limit to this growth, and once the customer base stabilizes, future growth will depend solely on existing client relationships.

Inter aims to grow its client base to 60 million, having reached 35 million. The speaker notes that Inter has stabilized its growth rate over several quarters, indicating a clear path to achieving its target by maintaining its current growth momentum, which presents a lower level of uncertainty compared to Nubank's growth potential.

The speaker highlights a significant discrepancy in market valuations between Nubank and Inter, with Nubank trading at 65 times earnings while Inter trades at only 19 times earnings. This suggests that Inter's growth potential is not reflected in its valuation, whereas Nubank's valuation is inflated by high growth expectations, despite uncertainties surrounding its future growth, particularly in credit dependency.

Inter has diversified monetization strategies, including an e-commerce platform that generates revenue through commissions, allowing it to potentially achieve higher revenue per client. In contrast, Nubank has a more limited capacity to monetize its customer base, which may restrict its long-term revenue growth compared to Inter's broader operational scope.

The recent performance of Nubank's stock has been disappointing, with a notable deceleration in growth that the market did not anticipate. Following this disappointing result, Nubank's shares have dropped over 15% in just two trading sessions. This decline highlights the risks associated with investing in stocks that are perceived to be overvalued, as investors may face capital loss.

There is a potential for capital migration from Nubank to Inter as the market begins to recognize the differing growth perspectives and valuation discrepancies between the two companies. If 5% of Nubank's investor base were to shift to Inter, it could effectively double Inter's market value overnight. Despite Nubank's stock having increased fivefold, there remains a strong growth outlook for Inter, which is favored by both the speaker and Ragazi.

The speaker hints at another investment opportunity that may have even greater potential for appreciation, especially following recent declines. This opportunity is expected to have a short-term trigger for growth. The audience is engaged in guessing the identity of this stock, with a playful competition for a book prize. The stock in question is revealed to be MRV, a major player in the low-income housing sector in Latin America.

MRV is identified as the largest real estate developer in Latin America, primarily focused on the low-income housing market, specifically the Minha Casa Minha Vida program. The company underwent significant growth since its IPO in 2017, increasing its annual sales from 6,000 to 40,000 units. However, after ambitious expansion plans in 2018 and 2019 aimed at doubling production to 80,000 units, MRV's stock became undervalued due to challenges in executing this growth strategy.

The discussion highlights a real estate investment strategy where properties are initially rented out and later sold to institutional investors, such as investment funds or real estate investment trusts (REITs). This model is implemented by companies like Urba in Brazil and its U.S. subsidiary, Ria, which replicates the same approach. The investments began around 2019, but the onset of the COVID-19 pandemic in 2020 disrupted the market significantly.

A significant increase in construction costs post-pandemic is illustrated through a graph showing inflation rates. The speaker notes that the construction sector faced severe challenges due to a major imbalance between supply and demand, exacerbated by disruptions in the production chain. Companies involved in the 'Minha Casa Minha Vida' program were particularly affected, as they operate on fixed pricing structures that do not adjust for rising costs, leading to compressed profit margins.

MRV, a prominent player in the housing market, experienced a drastic decline in its gross margin from a historical average of 32% to below 19% during the worst periods of the pandemic. This decline was particularly problematic for MRV as it was in the midst of an ambitious expansion plan, having acquired a large bank of land to develop 80,000 housing units. The pandemic hit just as these plans were set in motion, leading to unprecedented increases in construction costs and a halving of profit margins.

The speaker explains that the financial results of real estate companies like MRV are subject to a delay due to the accounting method used, which recognizes revenue over time as construction progresses. This means that the poor performance seen in mid-2022 was a result of sales made during the challenging years of 2020 and 2021. The recognition of revenue is tied to incurred costs, leading to a lag of two to three years before the financial impact of current sales is fully reflected in the company's financial statements.

The company acknowledged a delay in price adjustments, with significant increases starting in 2022. The average price of MRV properties remained below inflation until 2021, but from 2022 onwards, it rose significantly, resulting in a 61% increase in the average ticket since the pandemic, compared to a 44% inflation rate.

The gross margin indicator, currently at 34%, reflects the profitability of the projects MRV is selling today. This margin is expected to be reported in the financial statements in the next 2-3 years, assuming inflation remains controlled. The company is projecting a pessimistic inflation rate of 6%, up from 4% last year, indicating confidence in maintaining a healthy margin.

The improvement in MRV's results is attributed to a transition from a poor supply during the pandemic to a stronger supply from 2022 onwards. This shift is expected to enhance the company's performance as the better-performing projects contribute more significantly to the overall results.

The government has implemented various measures to support the housing market, including increasing subsidies, reducing tax burdens, and extending financing terms. These changes have revitalized the Minha Casa Minha Vida program, ensuring its continued relevance and viability.

A recent ruling confirmed that the remuneration of the FGTS, which funds the Minha Casa Minha Vida program, will be adjusted for inflation. This decision ensures that the program remains financially viable, allowing it to continue providing affordable housing options.

Despite rising interest rates, MRV has achieved record sales volumes while improving profit margins. The subsidized interest rates for the Minha Casa Minha Vida program mitigate the impact of higher financing costs, allowing the company to maintain strong sales performance.

MRV has expressed confidence in its future performance, providing guidance for 2023 that reflects a positive outlook. The company has shared its expectations for results, excluding cash generation due to external factors, indicating a strong belief in its operational success in Brazil.

The speaker discusses the financial guidance for the years 2024 and 2025, highlighting that 2023 is a pivotal year for the company, which had been operating at a loss until now. The projected profit for 2023 is modest, with guidance set between 250 to 290 million BRL. By the first nine months of 2023, the company has already approached 200 million BRL in profit, indicating a strong likelihood of meeting this guidance. The speaker emphasizes that a 15% increase in cash generation this quarter compared to the last is expected, which will also lead to reduced leverage.

For 2025, the profit is projected to increase significantly from 250 million BRL to between 700 and 850 million BRL, marking a substantial improvement in financial performance. The speaker notes that the market remains skeptical about the company's ability to deliver on the 2024 guidance, but anticipates that a robust performance in 2025 could change market perceptions, similar to the experience of another company, Inter.

The long-term vision for MRV is to sell 40,000 units annually, maintaining a sales volume with an average ticket price of 250,000 BRL. This strategy is expected to yield a revenue of 10 billion BRL and a profit margin of 15%, resulting in a profit of 1.5 billion BRL. The speaker expresses confidence in this opportunity, noting that a company generating such profits should be valued at approximately 22.5 billion BRL, based on historical multiples.

The speaker discusses the potential valuation of MRV, factoring in its American operations, which could be valued at a minimum of 5 billion BRL. However, a conservative estimate based solely on the value of ongoing and completed projects suggests a valuation of around 3 billion BRL. Combining these figures, the fair value of MRV could reach approximately 25 billion BRL in the coming years, while the current market valuation stands at only 3.6 billion BRL, indicating a potential sevenfold increase.

The speaker addresses the relationship between MRV and Inter, noting that both companies are part of the same group, managed by the same family from Minas Gerais, which also oversees Atlético Mineiro. While this concentration of risk could be concerning, the speaker views it positively due to the conservative management style exhibited by the family, particularly in credit issuance and market projections. The speaker highlights that Inter has grown to 35 million clients since its IPO, reflecting the management's cautious approach.

The speaker discusses MRV's potential to reach 4 to 5 million clients, highlighting that the company currently has around 35,000 clients. They emphasize that MRV's management is conservative and that the market has not yet recognized the company's future growth potential, focusing instead on past results. The speaker compares this situation to the delayed effects of interest rate changes on inflation, noting that MRV's current financials reflect 2021's performance, while the company is poised for growth in 2024.

The speaker explains that MRV's guidance indicates a target of 1.5 billion in profit, requiring the sale of 40,000 units at a ticket price of 250,000 each. They note that MRV is already selling over 2,500 units per quarter, with a gross margin of 34%. The speaker asserts that the current sales figures will soon reflect in the company's financial statements, leading to robust growth and visibility that is rare in the market.

The primary risk factor for MRV is inflation, which could significantly impact the prices of essential commodities like steel. The speaker mentions that for MRV to fail in delivering expected results, inflation would need to exceed the 6% threshold they are currently using for their sales margin calculations. They express confidence that MRV's current pricing and volume are solid, and it is merely a matter of time before these figures are reflected in the balance sheet.

The speaker advises patience for investors considering MRV, acknowledging that the stock may not perform well in the short term due to macroeconomic factors and market pessimism. They highlight the tendency of investors to group companies together, particularly in the real estate sector, without recognizing the distinct dynamics of different segments, such as those focused on middle and high-income housing versus those under the 'Minha Casa Minha Vida' program. The speaker encourages a long-term investment perspective, emphasizing that investing in quality companies will yield returns over time.

The discussion emphasizes the importance of patience in investing, particularly in undervalued companies like Inter and MRV. The speaker suggests that long-term investors will see their investments align with the companies' results over time. They advocate for a mindset focused on becoming a partner in a good company, highlighting the significant opportunity for capital appreciation in the coming years, especially for those who take advantage of the current market pessimism to build their positions.

The speaker clarifies that while they may recommend one or two stocks, a well-rounded investment portfolio should include multiple stocks to mitigate risks associated with sector-specific downturns or company-specific issues. They mention that their investment strategy includes a diversified portfolio of ten growth stocks, which allows for recovery over time even if one stock underperforms.

A promotional offer is highlighted, providing an 88% discount on the Smart Money combo, which includes the 10x product and small-cap stocks. The speaker notes that these small-cap stocks have significant potential for growth, especially after being negatively impacted by rising interest rates. The offer is presented as a valuable opportunity for investors to diversify their portfolios with a range of stocks.

The speaker discusses the process of portfolio rebalancing that occurs after each quarter, where they assess opportunities, uncertainties, risks, and pricing to determine if adjustments are necessary. They note that this quarter presents challenges for rebalancing since all companies in their 10x portfolio have performed well, indicating a strong overall performance across various sectors and company sizes.

The speaker emphasizes that the companies in their portfolio, regardless of size or sector, have shown strong performance over the last three trimesters. They focus on selecting the best companies based on specific opportunities rather than sector or size, noting that all companies are experiencing improving results and promising growth prospects, particularly in the context of current market pessimism leading to attractive pricing.

There is a significant discrepancy between the fair value of companies based on their growth potential and their current market valuations. Despite a macroeconomic environment filled with uncertainty, this situation presents substantial long-term investment opportunities. Investors who capitalize on market pessimism can build positions when expectations are low, as stocks are undervalued and not reflecting their true growth potential.

The speaker emphasizes that the most successful investors are those who take advantage of market pessimism to invest. During such times, stock prices are low, and the risk is minimized due to the absence of high expectations. However, many investors tend to make decisions contrary to this strategy, often avoiding stocks in favor of other investments like fixed income or cryptocurrencies. The speaker notes that rare opportunities to significantly increase one's wealth arise during these periods.

A question was raised about the contrasting performances of Direcional and MRV, both operating in the 'Minha Casa Minha Vida' sector. The speaker explains that the market is favoring companies like Direcional that are currently delivering results, while MRV has faced challenges that have impacted its performance. The market's capital has shifted towards companies that have managed to navigate the pandemic effectively, highlighting the importance of current performance in investment decisions.

Despite MRV's current struggles, the speaker believes it represents an excellent investment opportunity due to its potential for robust growth in 2025. This anticipated growth could serve as a catalyst for the market to reinvest in MRV, which has a strong historical performance in its sector. The discussion concludes with an invitation for audience engagement and a reminder of the ongoing Black Friday promotion for investment insights.