Sometimes the best investment ideas are in the last place you’d think to look. I recently added a value stock to my portfolio that I believe many institutional investors are overlooking.
The stock in question is Cresud (NASDAQ:CRESY), an Argentinian agricultural giant. But why Argentina, a nation unfortunately known more for its economic instabilities than for its investment potential?
Champions of the world
Patrick Boyle, a Professor of Finance at King’s Business School and a popular YouTuber, said in a recent video that Argentina is roundly ignored by the professional hedge fund managers he knows.
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Despite its recent footballing triumph, bountiful natural resources, and the European-esque charm of Buenos Aires, Argentina has long been considered ‘uninvestable’.
The reasons are not far-fetched. Inflation is soaring above 100% a year, the nation has a history of debt defaults, and it is currently the IMF’s largest debtor.
However, the election of right-wing, free-market economist Javier Milei as president could herald a new era.
Fields of fortune?
Enter Cresud, an established presence in the Argentinian agricultural sector since 1936. This company not only boasts a significant portfolio of farmland in Argentina but has also extended its reach to Brazil, Bolivia, and Paraguay. Listed both on the Buenos Aires Stock Exchange and NASDAQ, Cresud has a market cap of $1.5bn and looks cheap with a price-to-book (P/B) ratio of 0.59 and a price-to-earnings (P/E) ratio of seven.
Cresud’s stock has already seen a 25% rally in a month, fuelled by international optimism around Milei’s market-friendly policies. His political programme contrasts starkly with that of his predecessor Alberto Fernández, a left-wing protectionist.
Argentina is one of the few nations on Earth that taxes its own exports. In Argentina, exporters like Cresud are forced to convert dollars to pesos at an artificial exchange rate. Right now, the free-market exchange rate says US$1 is worth around 1,100 Argentinian pesos. But exporters, who receive dollars for their goods, were only given 400 pesos per dollar by the central bank upon converting under the previous administration’s policy. Clearly, this massively impacts exporters’ profitability.
But Milei has promised in no uncertain terms to dismantle this system. That could allow Cresud to increasingly capitalise on the global agricultural market. Remember, the world is in the middle of a food shortage exacerbated by the war in Ukraine.
Don’t cry for me, Argentina
Like with every investment, there are risks. Milei has promised to make massive cuts to government spending. This could easily ignite public unrest and lead to his removal from office. My investment case for Cresud in that case would be undone.
Don’t underestimate the instability of Argentinian politics. Previously, the country went through five different presidents In just 12 days (from 21 December 2001 to 2 January 2002). One of the unlucky statesmen handed the keys to the Pink House in that period had to be airlifted to safety by a helicopter!
Still, I’ve opened a small position in Cresud, and I’ll be looking to add more if the price pulls back from its recent rally.
