Welcome to your third tip from the Fleet Street Platinum Service. And this time I believe the team has uncovered a real gem. I am targeting a 50%-75% gain for this one in 2004 - and that's just for starters!
Gold in the 1970s, consumer stocks in the 1980s, tech stocks in the 1990s... where will the next super-bull market, of the 2000s, appear? Looking at the world's situation, I believe the likely answer is to be found in commodities. Not only have fast-growing powerhouses like China and India a nearly insatiable hunger for raw materials, there are also powerful changes under way that are set to create much higher demand for certain commodities. A little further down, you can read what one of my international company sleuths found out about a little-known agri-business in Argentina. But first a very short update on our first two recommendations from the investment team:
Teton Petroleum (AMEX: TPE)
Teton hasn't released any news since last time, but an admission from Shell adds an interesting aspect to the story. As prominently reported in the world's press, Shell had to admit that it had previously overstated its oil and gas reserves by up to 20%. This is yet another sign that Western oil majors are desperate to add new stock to their oil reserves.
With Iraq's entire reserves possibly going to a new state-run, Iraqi-owned company, Russia appears all the more to be the world's most attractive area for acquiring additional oil fields. This sets the stage for the price for Russian oil reserves catching up with prices paid for their Western equivalents, which should help Teton's share price. The price is hovering around our $4.80 limit, below which this is still very much a BUY.
Leucadia (NYSE: LUK)
Shares temporarily rose to more than $50 and are now back to $48 - slightly below our buy limit of $49. If you haven't bought into this gem of an investment company yet, now is a good chance to do so. BUY.
That's the updates out of the way. Now for the main dish of the day - read on:
Little-Known Agri-Business In Argentina : Welcome to the farming success story of the 21st century
When researching a slightly unusual investment opportunity that is situated at the other end of the earth, it's best to check with local experts who've got a true bird's-eye view of what's going on. This is - literally - true for Horacio Castagnola. When it comes to farming in Argentina, he is the man with the best overview you can get:
Castagnola is Argentina's Director General of taxes, the equivalent to the UK's Commissioners of Her Majesty's Inland Revenue. If you think taxes in Argentina are collected by inspectors touring fields on horseback, you are in line with what the majority of Europeans think... but you're also dead wrong.
Every sixteen days, Castagnola gets satellite photographs of the multicoloured patchwork of farms in Argentina's fertile areas. By cross-checking land registers with the satellite images taken from 500 miles (800 kilometres) above the earth, he can keep track of who is planting which crops, when they will be harvested, and ultimately how much tax they ought to be paying. It certainly is a Big Brother vision coming true, but it's efficient for the farmers too, and generally that's good for business. Argentine farmers can concentrate on what they do best: Raising what is arguably the world's finest cattle and growing some of the highest quality crops you can buy on the world market.
Argentina is the world's bread basket
I don't want to bore you with statistical data, but in the case of Argentina the bare numbers are worth a look. The country has a land mass of 2.76m sq km, which is 11 times the size of England. The population density is just fourteen people per sq km, compared to 245 in the UK. With a third of the entire population living in the country's capital, Buenos Aires, the population density outside the main metropolitan area is even lower.
Argentina has vast expanses of plains and pastures... with the most famous part being the Pampas, an area that covers about a quarter of Argentina's total land area. Comprising the provinces of Buenos Aires, La Pampa and major parts of Santa Fé and Córdoba, the Pampas are inhabited by pumas, wild chinchillas and - most importantly - millions of cattle.
All in all, Argentine farmers have a herd of 50m cattle, and it is well known that Argentine beef is simply the best in the world. Argentine cattle grazes on extensive plains eating grass off the ground rather than being force-fed artificial feed as is the case on most farms in Western Europe or the US. Agriculture in the area also includes the growing of wheat, corn and oil seeds. The soils of the Pampas are among the richest in the world.
Argentina's 20th century failure brings your greatest opportunity
Despite these natural advantages, Argentina managed to significantly fall behind other nations. In 1913, the country was one of the world's richest economies, ahead of France and Germany. The soil and favourite climate of the Pampas played a crucial role in Argentina's success. But nowadays, income per person is only $10, 500, far behind the $25,300 income per person earned in the UK and the $36,300 achieved in the US.
Recently the country fell behind even further. As a result of the worsening of the recession that began in mid-1998, during 2001 Argentina's economy shrank by 5%. When the government in Buenos Aires subsequently ran out of cash, it cut civil service wages and state pensions by 13%. The measures led to the entire economy being short of cash, and local administrations in some provinces even started to print their own currency to be able to cover their expenses - adding further to the chaotic situation. In 2002, the Argentine economy shrank an incredible 10.9%. It was a crisis comparable in magnitude only to the Great Depression of the years following the stock market crash of 1929.
Sensing trouble for their local banks, Argentines started to pull their money out of their bank accounts. By the time footage of endless queues in front of banks appeared on television, a panic run on banks was in full swing. On December 3rd 2001, the Economy Ministry issued a regulation limiting cash withdrawals from bank accounts. Shortly later, the Alianza Party government under Fernando de la Rua resigned amid growing pressure from the population.
During the following 10 days, the country had three interim presidents resigning and declared a cessation of payments on foreign debt. Argentina defaulted on $120bn of foreign debt and made its entry into the history books for the largest and most complicated debt default ever.
Pages could be filled on the ensuing arguments with foreign creditors or about the new president, Nestor Kirchner, negotiating with the International Monetary Fund (IMF) for a partial debt relief. But from a speculator's point of view, what's been discussed in the press is priced into the share already and is therefore water under the bridge.
What I am interested in is a look at things from a different perspective than anyone else... because only if you are ahead of the crowd can you beat other investors at the game of buying low and selling high. And it is the opportunity to buy into Argentina on the cheap which leads us to believe that Argentina's crisis will actually prove to be a great investment bargain.
Factsheet: Argentine Republic
Population: 38.74m
Land Area: 2.76m sq km
GDP: $403.8bn
GDP per capita (purchasing power parity): $10,500 (UK: $25,300)
GDP by sector: 5% agriculture, 28% industry, 66% service
Inflation rate: 4.2%
Unemployment rate: 21.5%
Currency: Argentine Peso (ARS)
Exchange rate: 100 ARS = £18.66
Source: CIA Factbook; all figures from 2002 (except for the exchange rate)
Meet Argentina's leading farming company
Enter CRESUD, one of the few agricultural businesses you will find listed on the world's stock markets. I did a survey of agri-businesses that are quoted on any stock market anywhere around the world, and found only about 30 such companies. There is practically no research on the sector, and most of these companies never get covered in mainstream publications. CRESUD is all the more interesting for that reason. And in case you were worried about having to instruct your broker to buy shares on the Buenos Aires Stock Exchange, I thought I should let you know right at the beginning that you will be able to easily trade today's share recommendation on the Nasdaq market.
CRESUD is a decades-old livestock and farm-product company. Founded in 1936 and officially going under the grand title of 'Cresud Sociedad Anonima Comercial Inmobiliaria Financiera y Agropecuaria', it produces crops, milk and beef... and even more importantly, it is as pure a bet on Argentine land bargains as you can get.
At last count, the company owned 126,100 acres of beef-cattle farmland and 13,217 acres of arable farmland. In addition, CRESUD had leased crop farms totalling 8,489. The headcount of its cattle herd stood at 83,767, which makes CRESUD one of the largest owners of cattle in the country.
Why the crisis is a shot in the arm for Argentine farmers
When the Argentine economy collapsed in late 2001, the country joined Enron and Worldcom as global symbols of financial meltdown. Prior to the crisis year, Argentina had a currency peg that made one peso equal to one US dollar. The currency peg led to a steep overvaluation of the peso and made Argentina one of the world's most expensive countries to do business in. As a matter of fact, the overvaluation of the peso made it so unattractive for foreigners to buy Argentine goods that in 2000, only Rwanda, Burundi and Haiti exported less as a percentage of their overall economy than Argentina did!
A currency devaluation hurts those holding the currency, but for businesses that depend on exports it's quite simply the best thing that can happen: The peso lost up to 75% of its value, making Argentine goods much cheaper for buyers from outside the country.
Even when most of Argentina's economy was still groping for the smelling salts, the farm sector's export sales started to boom. All of a sudden, Argentine farm produce was not only the best quality you can find in the world, but also available at a bargain price.
CRESUD suffered insofar as its sales in Argentina declined, and along with the rest of the local stock market, its stock price lost more than 83%. But as is always the case with economic crises, some players emerge stronger... and this is where I expect CRESUD to come into its own.
Quality Argentine farm produce is increasingly in vogue
I feel CRESUD's operative business is well-positioned to perform strongly over the years to come. There are several factors pushing demand for CRESUD's products, with two being potentially powerful long-term trends.
Now that mad cow disease has struck the US, demand for Argentine beef will be boosted by additional demand from North America. Also, demand in Europe is growing each time a new food scare breaks out. For example, when the recent farmed salmon scare hit the headlines, consumers were yet again reminded that eating any kind of animal that's raised on industrial-style farms isn't conducive to staying healthy.
Additionally, I see vast potential for Argentina becoming a prime exporter of soy, too. Not only are health-conscious consumers driving up the demand for soy, I also expect a revolution in the use of the oilseed as a base for producing fuel. Biodiesel, which can be won from either rapeseed or soy, is set to become a significant contributor to Western Europe's fuel needs. Shell and BP just announced an initiative in Germany, planning to add 5% biodiesel to its conventional fuels.
A spokesman for US agriculture concern Archer Daniels Midland, one of the world's prime producers of soy-based oils, expects a shortage of raw material for producing biodiesel - which should result in a permanent rise in price for soy. With BP having rebranded itself as "Beyond Petroleum", soy-based biodiesel could be in for a surprise growth spurt. In its last quarterly report, CRESUD mentioned that soy prices have risen by 50%. Soy contributes 34% to CRESUD's agricultural sales.
World-class, dirt cheap land assets are the icing on the cake
The CRESUD agri-business is a great foundation for your investment. It provides the company with cashflow and gives investors a tangible perspective for steady growth. But the main interest lies in the potential for a strong appreciation in Argentine land values.
As everyone who has ever sat a class in basic economics knows, in a perfect world - with all things being equal - prices for agricultural land should only depend on its productivity. Since Argentine farmland is the most fertile in the world, it should also be the world's most expensive farmland. However, currently it is the world's cheapest farmland - making it just the kind of bargain that we at Fleet Street Platinum Service are always on the lookout for.
In the prosperity of the 1990s, farmland prices in Argentina rose from $2,000 to $5,000 per hectare. When the country was struck by political and economic turmoil, prices collapsed. In the aftermath of devaluation, CRESUD picked up 8,000 hectares of farmland at $1, 100 per hectare. The latest figures for 2003 show that the average price for farmland stood at roughly $1,500 per hectare.
The CRESUD share price suffered during the currency crisis, but its status as a publicly listed company nevertheless gave it an important headstart: In November 2002, when thousands of Argentine companies declared bankruptcy, CRESUD managed to place a $50m bond with investors. With its company coffers full of cash, CRESUD was in the position to buy assets off cash-strapped debtors - buying at fire-sale prices.
CRESUD continues to buy up cheap land. It's not as cheap as it was during the height of the currency crisis, but because of current limitations for foreigners buying farmland (to prevent the country being sold out to foreign investors on the cheap), CRESUD CEO, Alejandro Elsztain, is likely to continue to be able to pick up bargains.
Just compare the prices CRESUD pays for farmland to the prices paid for less fertile land elsewhere, and you start to grasp the potential of this share: In Illinois and Iowa, in the midst of the US' corn belt, a hectare of farmland fetches $7,500. If you want to buy a hectare of farmland in England or Wales, the going rate is £7, 500, which translates into $13,700. In other words, farmland in Argentina can be had for roughly a tenth the price of land in England, while yielding more - and higher quality - produce.
CRESUD becomes the prime Argentine land company just as the economy perks up
The writing on the wall is that Argentina is already on the mend. True, the government is still haggling with foreign investors about how large the eventual write-off of debt will be. But recent figures show that Argentina's growth recently exceeded even optimists' estimates.
In November, Argentina's economy grew at an annualised rate of 8.7%.
The country's economy has now grown for 12 consecutive months, and growth for the entire year should come out at 7.8% to 8% once the final figures for the entire year are available. That would compare with the central bank's official estimate of 7% and would make 2003 the best year since 1997, when the economy expanded 8.1%.
Yes, there are still bumps on the road, but I feel that now is the time for contrarian investors to look 1 or 2 years down the road. The Argentines are by nature enterprising people, and with sentiment steadily improving, the country should make huge progress in 2004, too. The news about Argentina staging a gradual turnaround will hit the newsstand this year, and provide additional demand for investments in Argentina. Investors who haven't looked at CRESUD for a few years will find that not only has the structure of the agri-business of the company improved during the crisis years, but the company also extended its reach into another branch of the Argentine property sector.
The IRSA deal was a masterstroke
With the cash raised through the bond issue, CRESUD bought a controlling stake in IRSA, a first class property company. It is actually the largest and most diversified commercial real estate company in the country, and the only company within its industry that is listed not only in Buenos Aires, but also on the New York Stock Exchange ("IRS"). CRESUD owns 23.3% of IRSA's shares, and through an investment into a convertible bond it will eventually be able to raise its stake to 40%.
IRSA's principal activities consist of developing and managing office and non-shopping centre retail space as well as residential properties. The commercial properties IRSA usually rents out, the residential properties it puts up for sale. The company also buys undeveloped land reserves. It counts Cisco, Danone, MTV and Chrysler among its tenants. With 1.3m square feet of leasable space it's the prime real estate player in Argentina.
(If you fancy a closer look at IRSA's range of properties and projects, check out their excellent website at www.irsa.com.ar. If you ever believed emerging market companies lack transparency, IRSA should change your mind. Last year, US-based Investor Relations Magazine awarded IRSA the prize for the best investor relations by an Argentine company!
Important for us is the fact that with its investment in IRSA, CRESUD has a double leverage effect: Not only did CRESUD buy its stake in IRSA during the Argentine capital markets' darkest hours, but IRSA had also been active as a cunning buyer of distressed property. In the same month that CRESUD placed its $50m bond, IRSA hit the market with a successful placement of a $100m bond. Again, while almost everyone else had to sell, IRSA expanded its portfolio on the cheap.
Argentina is shaping up to surprise the outside world
Argentina's recent growth figures were a surprise to the financial community outside the country, and my research leads me to believe that the country has more surprises in store. Anyone who follows the business news is aware of the massive offshore outsourcing currently going on in the US and the UK.
To save costs, activities like running phone hotlines are being outsourced to India, where labour costs a fraction of Western wages. This has led to explosive growth in some areas of India, bringing with it rising property prices.
The same is likely to happen in Argentina - only practically no one has noticed this story so far. I dare to predict that in the next 2 to 3 years, Argentina will become known as another prime location for outsourcing.
The outsourcing wave has hit Argentina!
Consider the facts: The country has abundant broadband capacity (or bandwidth) thanks to thousands of miles of fibre-optic cable laid throughout Argentina after the deregulation of its telecom industry in 2000. That makes it possible to work seamlessly with associates around the world. Argentina also has the highest level of higher education in Latin America, ensuring a steady supply of technical know-how. Most important - and this is where Argentina beats India - it is in the same time-zone as the US! Throw in the fact that Argentina's workforce are the best English speakers of the region, and you won't be surprised to hear that Microsoft, Motorola, IBM and Sun Microsystems have all beefed up their operations in Argentina.
Get ready for Argentina making news as the world's latest high-tech and offshore venue... and guess which company is set to provide office space for the growing Argentine service industry!
Contrarians - come and take the plunge!
This is the lowdown of the equity story... In my view CRESUD offers everything you need in order to follow that crucial, four-word financial truth that lies at the heart of every investment opportunity: Buy low, sell high. This pinnacle of wisdom is so simple that a child can understand it, yet it still divides the investment world into two camps... the conventional investor and the contrarian investor.
Conventional investors tend to follow trends only once they are well-established, and usually they only invest their capital once a market has already rallied substantially. They want evidence that a bull trend is already well established before they take any risks.
In the case of CRESUD, some of that evidence is still to be delivered: Argentina has not yet totally overcome the crisis, the defaulted debt still needs to be dealt with, and President Kirchner's occasional fits of Peronist politics, like the recent revoking of a deal with a French defence company, do pose an investment risk. But being contrarians at heart, we want to buy ahead of the crowd, when an investment is cheap from a fundamental perspective because other investors still shun it. This takes a bit of courage, and a willingness to take some risk.
Gunning for a 50% to 75% gain before the end of 2004
Interestingly, in endless prominent academic studies of financial market history, the only investors who virtually always make money are the contrarians. That's why - after carefully considering the risk/reward ratio - I rate CRESUD as a screaming buy for anyone who wants a realistic chance to make a property investment that can multiply within the next 2 to 5 years. I expect a first 50 to 75% rally within the remainder of 2004, mainly because of the story about Argentina's impending turnaround is bound to make headlines in the US and European press.
Also, what few investors outside Argentina know is that the Argentines have stashed an estimated $100bn in offshore accounts. Once the dust settles, some of that money will come back, and a large part is bound to be invested in the local stock market.
In the ensuing years, the shares should be driven by a combination of a profitable and growing agri-business and capital gains in its property portfolio. In the long-run, the capital gains on the property should far outweigh the importance of the agri-business... but it's good to know there is a solid foundation of recurring sales and earnings.
Buy now and bag yourself a great discount
At their current price of $11.81, CRESUD American Depository receipts (ADRs) which each represent ten ordinary shares, trade only slightly above their book value of $10.86. Factor in that it has hidden reserves in its land bank, and you actually buy into Argentine land at a discount to its already cheap price.
What is seldomly publicised is that in addition to the roughly 140, 000 hectares of farmland it uses for its agri-business, CRESUD owns another 272,000 hectares of reserve land that is not yet exploited to its full potential. Also, there is some farmland in the company's portfolio that could be turned over to IRSA in the future for building commercial or residential property. It goes without saying that an acre of residential land is worth many times what an acre of farmland costs.
With no earnings estimates available, the company is difficult to value from an earnings perspective. But if you are an investor looking to buy into cheap tangible assets, CRESUD is a safe bet. Just to give you an idea, during its last fiscal year, CRESUD sold two farms and received a price 68% above their book value.
However you look at it, CRESUD has vast upside potential for the long run as well as the appeal of a potential turnaround for the next 6 to 12 months. Buy with a limit of $14. My 12-month price target is $18 to $21. Place a stop loss at $8.50.
Until the next unique opportunity arises.
Happy global investing.
Mark Geoghegan
Fleet Street Platinum Service, Special Situations Editor.
