Let’s start to look at ways to make money in an environment that may be a bit chaotic for the next few weeks. I want to step away from U.S. equities and bonds.
Instead, I want to take a trip to Brazil, where there seems to be a pretty stunning opportunity emerging… An energy play… with a 15.5% dividend… deep value upside… and momentum. It’s for the bold, but it’s as good as it gets right now.
Thanks Uncle Sam
So, the Fed might raise interest rates to 2% this year. That’s the highest case scenario. Are you excited about the prospect of making 2% on your money at a time when inflation is running at 7%? (Higher than that, actually, because who believes government numbers.)
Well, let’s look for something that can beat inflation and appreciate in value. How about Brazilian oil giant Petrobras (PBR).
Now, hold on. I know what you’re thinking. This is a government-owned company. It’s run by a government that has been quite inefficient in recent years. And Brazil isn’t known as a bastion of safety… has it?
Well, all that is why the company is trading at ridiculously low metrics. In fact, one could argue that it’s already being priced at a level that suggests they would turn off their spigots or oil prices could collapse. It’s trading at a price-to-earnings ratio of just 3.5.
The price-to-cash flow is an almost comically low metric of 3. It has really strong profit margins (operating at 39.4%, and net margin at 34.1%). And it’s balance sheet has improved across every single metric in the Piotroski F-Score.
Petrobras‘ Real Case for Growth
What’s been fascinating to watch here is the bias against this company. I get it. But look at the world around us. While the West is in a big rush to stop producing oil and turn to green sources, opportunity abounds for nations that are pulling it out of the ground.
We are not going to stop using oil. It would be economic suicide in the next 20 years to stop – but that will not stop politicians with zero understanding of how the world economy actually operates.
The entire economy that you know… was built around oil and gas. Oil is the lifeblood of the global economy… it’s what made it grow and what makes it possible. Imagine trying to take the human body – with its complex circulatory system – and trying to stop it from running on oxygen and replacing it with cat food… quickly. It’s impossible. Both scientifically and economically.
So while other nations try to keep it in the ground (or experience economic calamity like Iran, Venezuela, and Libya), Brazil will be a global player and exporter.
Calculated Geopolitical Risk for Petrobras
Petrobras’ political risks are already priced in. There seems to be this belief that Brazil is going to remain a calamity in the future. But energy is typically a priority for nations that use crude as an important balance sheet metric. Brazil has historically been a politically neutral nation, and it has good relations with China and the United States.
While its neighbor Venezuela absolutely implodes and loses global market share due to mismanagement, Brazil has the potential to pick up significant market share and feed the needs of economic partners around the globe. In fact, Venezuela’s failures are why Brazil has been able to increase its production by more than 50% in the last eight years.
The opportunity is not priced in – particularly around domestic demand alone. The nation is poised to increase its petroleum demand by 34% over the next 30 years, according to the Energy Information Administration. Who will supply the bulk of that crude? You guessed it.
The stock price also doesn’t reflect improving financials in the balance sheet as the company pays off debt and looks to send even more cash flow toward investors. There is chatter now that PBR could easily see its dividend push north of 20% for the next three years.
If that doesn’t push the stock higher, then just buy the stock and dividend reinvest. You’ll be getting lots of shares in the process, and that will benefit you over the long term as more and more global institutions wake up to the potential in this play.
Higher oil prices will reflect a higher share price. But the improving cash flow, lower production costs, and increased market share REALLY present opportunity. Best of all, this stock has been gaining steam over the last 12 months.
A combination of value and momentum presents a promising opportunity for the road ahead.