ASR - High Moat Companies And Mexico's Long-Term Story With Ian Bezek

2023-10-19 09:45:00 ET

Summary

• Ian Bezek favors high moat companies and stable, consistent businesses with durable advantages.
• He sees opportunities in devalued food and beverage stocks and alcohol stocks.
• Bezek is optimistic about the long-term story of Mexico and the potential benefits of the upcoming election in Argentina.

Listen below or on the go via Apple Podcasts or Spotify .

Ian Bezek explains why he favors high moat companies (2:00), why alcohol stocks are interesting (5:20) Latin America and Mexico's long-term story (6:40) Argentina always a trade, never an investment (12:10).

Nathaniel Baker: Welcome to the Investing Experts Podcast by Seeking Alpha. I am your host, Nathaniel E. Baker, Senior Editor here at Seeking Alpha. I am joined today by Ian Bezek of Ian's Insider Corner . Ian, thank you so much for joining the podcast today.

Ian Bezek: Thank you. Thanks for the invite. It's a pleasure to be here.

NB : It's great to have you on. I'm really looking forward to our talk. Because I know you have a background also working at a hedge fund. So, what I'd like to do to start off is, to, for you to maybe take us back and tell us what got you interested in investing in the first place? And then kind of just walk us through your career real quick to where you find yourself today.

IB : So I actually got my start through Seeking Alpha. I published my first article in 2008, just as a college student doing some research in my spare time. I graduated with a degree in economics in 2010 and I kept writing for Seeking Alpha.

And actually a hedge fund found my work through Seeking Alpha and said, hey do you want to do a kind of internship with us? And that turned into a full-time position. And so, I worked at Kerrisdale Capital, a New York hedge fund for 3 years, primarily activist fund. We would look at companies often, companies that we felt had problems and issue short reports about them to kind of make the market more aware of places where we thought there were issues.

So I did that through 2014 and then kind of set off on my own, learned Spanish, moved to South America and have been here ever since. Write my newsletter, which covers opportunities both here in Latin America and also in the U.S.

NB : Oh, that's wild. Where in South America are you? I had no idea you were there.

IB : Yeah, I'm in Colombia today and previously we lived in Mexico and Argentina as well. So, seen a little bit of everything.

I primarily focus on, I'd say high moat companies, companies that I think have durable advantages. I used to be more interested in, kind of the deep value stuff, but over time I found that that didn't really -- it wasn't a good strategy for me.

I understand how it works for other people, but for me I like companies that are stable, consistent, that if you can grow earnings, high single digits, low double digits every year, that's the sort of company that I'm going to be most interested in.

NB : Oh, that's interesting. So, the moat for you is more important than the valuation and the fundamentals and what multiple it might be trading at?

IB : Yeah. I mean, ideally the longer you own a company and you get the benefits of its high return on equity, return on invested capital every year – the starting valuation will matter less and less over time as long as earnings keep growing kind of as you modeled.

Obviously, I don't want to overpay for stocks, but I'd rather buy a high quality company at say 23 times earnings rather than some cyclical company with a bad balance sheet just because it's 18 times earnings. I'd rather pay up a little bit for the more dependable business.

But I'd say the big attraction this year is the election in Argentina, which will be later this month that's going to have big ramifications for its stocks.

NB : Do you own any Argentine stocks?

IB : I own a couple. I own the airport company there. That's a big position. And then I just bought a basket of pretty much everything, very small positions of everything that was listed in Argentina, kind of when their economy collapsed on the thought that there would be an election eventually, and these things would revalue sooner or later. I have a brokerage account in Colombia to buy stocks here in pesos, but aside from that, I buy the ADRs.

NB : So, what else can you tell us about where you're seeing opportunities right now or some of the businesses that might have your interest?

IB : Probably the place I've been spending the most time recently is just looking at all these companies that have been kind of devalued due to rising interest rates.

There seems to be just a general mentality that any bond proxy for lack of a better word, like any company that people buy for the dividend yield has dropped in value because people say, oh, I can get 5% of my T-bills. Why am I going to buy a dividend stock that only pays 3% and 4%? But I think there's been pretty – people are just selling everything indiscriminately.

Like in the food stocks, for example, food and beverage, we have big sell-offs everywhere. And some of that's related to the weight loss drugs , but you'll see a company like McCormick ( MKC ), which pretty much doesn't sell calories, they sell black pepper and vanilla and cinnamon. Their stock is down as much as like PepsiCo ( PEP ), these companies that sell junk food and this doesn't really make much sense.

So, just seems to be people are just kind of selling everything without paying too much attention. I think there's opportunity for people to buy the higher quality companies that are getting thrown out with the bathwater.

NB : Is there anything specific that you like there? You mentioned McCormick. Anything else?

IB : Quite a few of the staples. I like McCormick . I like Hormel ( HRL ), which is protein focused. Specifically, as it relates to the weight loss drugs, doctors are telling their patients eat more protein to avoid muscle loss with these drugs.

And so I think Hormel's protein, basically their whole portfolio, is focused on protein. And so I don't see that as a loser from the weight loss drugs. And yeah, I think that's the single most beaten up food stock.

This is its largest drawdown in the past 40 years. I think that's an opportunity. People are making much ado over some fairly minor problems.

I think the alcohol stocks are interesting as well. I don't think, maybe you see a drop in beer sales from the weight loss drugs, but I don't think it really affects spirits because that's more – less frequently consumed, higher price points. People are going for the experience. And so, I think Diageo ( DEO ), Brown-Forman ( BF.B ) here, multi-year lows, very interesting as well.

NB : Budweiser or Anheuser-Busch ( BUD ), I should say?

IB : I don't have a strong opinion. I don't own it, not short it. Obviously their marketing missteps earlier this year really hit them. I don't think we've ever seen such a big drop in share for a consumer products company like that.

I do own some Molson Coors ( TAP ), which is probably going to benefit from taking share. It's quite cheap, but – I have some challenges, but it seems like adoption of Craft Beer slowing down perhaps with inflation and the economy slowing a bit people don't want to pay $14 for a 6 pack of Craft Beer.

Maybe we see some shift back to mass market. In any case, they're taking sales from Anheuser-Busch for the time being. Yeah, I like Molson Coors.

NB : You mentioned Argentina potentially? What about anywhere else in the region?

IB : Yeah, I think Mexico is, kind of the biggest long-term story thanks to the pandemic and kind of the changes in supply chains. I don't think companies are comfortable having as much of their manufacturing in China and Vietnam very far away. And so, Mexico with its great railroad access to North America, the new free trade deal that they passed a few years ago, I think you're going to see an explosion in activity in Mexico.

Now, you've seen big companies like Tesla ( TSLA ). Tesla just announced a $5 billion plant for Mexico. So, I think you see when people like Musk put capital like that into a country, I think it gives the green light to a lot of other people like, hey, we need to take a fresh look at Mexico. Maybe we can optimize our supply chains there.

Yeah, I really like Mexican industrial companies and also anything that benefits from consumer because you have a lot of people that used to work at a minimum wage and others getting these manufacturing jobs that pay 4 times or 5 times as much as they used to earn. So that flows through to all sorts of spending.

So, I own stock in Walmart Mexico ( WMMVY ), which is just what it sounds like. And Walmart ( WMT ) U.S. retains 70% of the ownership with the other 30% being listed. And so that gives me a lot of confidence that the company is well managed. And I think the market opportunity is very broad there. They have a larger portion of GDP in Mexico than Walmart U.S. is in the U.S.

And their e-commerce business has been much more successful in Mexico because they kind of launched at the same time as Amazon (AMZN) in Mexico rather than starting from way behind. It's OTC, but it's – there's a lot of volume because it's like a $60 billion, $70 billion market cap.

NB : Yeah, that's not nothing. Yeah. All right. Walmart, Mexico, that's interesting.

And you've also historically liked some of the airports there. There was a bit of a sell-off in one, but are you still constructive on that space?

IB : Yeah, I'm still upbeat. They're very attractive and that you earn very high profit margins. Anytime a plane lands at your airport, you get, depending on the airport, like $14, $15. Plus you get retail, car rentals, hotels, advertising. There's so many different kinds of revenue tools there and you effectively have local monopolies. Just once you build an airport, no one's going to build another airport next to the first one.

Like you mentioned, there was a sell-off a couple of weeks ago because the government, the full details are now that the government wants to lower tariffs, the fee is about 5% to 8%, which would kind of reverse. In 2020, the airports got higher tariffs to compensate them for COVID, but now it appears that since that has ended, the government wants the rates to go back down.

But this was poorly communicated with the market, and so the stocks plunged, and you saw the headlines about socialism and how you can't trust South American markets and all. But I think now that cooler heads have prevailed, they say, oh, well, they kind of did earn more during COVID and it's kind of fair to return to 2019 profit levels.

But yeah, I think there's a large opportunity in those names now because they have the lowest valuations aside from March 2020 of the past decade. You get starting in 4% or 5% dividend yields and should be double-digit earnings growth going forward.

NB : Right. What was the company there? It's Grupo Aeroporto Del Norte?

IB : Yeah, that is, Del Norte ( OMAB ) is Monterrey and then Pacifico ( PAC ) is Guadalajara and Tijuana and then Sureste ( ASR ) is Cancun.

NB : And they all sold off if you look at the charts, right. But you think that was overblown and maybe presenting an entry opportunity?

IB : Yeah, I would say the government's, what we know publicly that's been reported, I would say that lowered my fair value estimates 10% to 15%, but obviously the stocks dropped quite a bit more than that.

NB : But it doesn't sound like some kind of government takeover type of thing. It sounds just like a policy that was due to be – to change anyway due to extraneous circumstances, right?

IB : I mean, AMLO has meddled in the private sector. Sometimes he seized some tracks from a railroad. He's in cabinet domain, claimed it was a government entity. He's been involved in several other actions like that, but so far, anytime he's made a move like that, he's compensated the investors in total for their losses. I believe the railroad was actually, they were given an eight-year contract extension for their other rails in return for having a small piece of their rail taken, but I believe the stock actually went up after that.

He meddled in the Mexico City airport, but they paid off the bondholders in full. I see them as just negotiating, kind of being, acting with a heavy hand sometimes, but so far he's treated everyone fairly. And when he talked about the airports, he said that he will honor the contracts that are there, they’ll negotiate, but honor the contracts.

Yeah, I see them as pro-business government that sometimes communicates poorly, but not – the people comparing what's going on in Mexico to Chavez or anything like that are totally off-base.

NB : Now coming back to Argentina, maybe to close out on this, what -- can you tell us what the -- what's going on, like what the stakes are for this election exactly and how likely it is that you get a pro-government, pro-business type of thing? Because there's been a lot of these false dawns before in Argentina and hopes and stuff and -- but is, might this time be different?

IB : That's right, yeah. I'd say Argentina is always a trade, never an investment in the sense that you can't just buy a stock and sit on it for the next 10 or 20 years there without thinking about it.

But yeah, so you had a conservative government in Argentina from 2015 to 2019 that did poorly and so they were voted out and then kind of the new guys took over and immediately got hit with COVID and they just kind of ran the printing presses to pay everyone during the pandemic and so you had the Argentine peso devalued dramatically. And the inflation rates at 120% now, so full on hyperinflation. And so obviously voters are very upset about this.

The current President is not running for reelection. His party is running, but it doesn't look like they're going to win and so either there's two opposition candidates because it's not like the U.S. where you just have Republicans and Democrats. There you have multiple parties. And it appears that either a center-right candidate will win or this guy, Milei, who's a libertarian, like far-right, who wants to get rid of the peso, kind of switch to dollars, radically cut government spending.

And he is up in the polls. But it's somewhat difficult to forecast because if no one gets more than 40% of the vote in the first round, then there will be a runoff between the top 2 candidates. And so, we don't know if the runoff will be between the libertarian and the conservative, in which case a pro-market’s outcome is guaranteed, or it will be between the libertarian and the socialist government, in which case there would still be substantial uncertainty. But yeah, if the libertarian wins, that would be hugely beneficial to markets.

And particularly of interest, he was the Chief Economist at the airport company, Ticker ( CAAP ), Corporacion America Airports. He was their Chief Economist back when he worked in the private sector. So, it would be very interesting to have him as President. It would probably be very pro-infrastructure would be the guess.

NB : And he wants to -- is he the guy that wants to abolish the Central Bank?

IB : That's correct. Burn it down is his quote.

NB : Just have dollars as your local currency or a dollar peg, fully dollar pegged?

IB : That's right. And Argentina did that for about 10 years in the 1990s. And it was very successful for about 8 years. And then, kind of in 2000, kind of all the Latin American economies ran into trouble and Brazil defaulted and that made Argentina uncompetitive because they both grow crops and cows and everything and so when Brazil defaulted that forced Argentina off the dollar peg as well.

A lot of people said the economy did its best in kind of recent Argentine history in the 90s under the dollar peg and so worth giving it another shot.

NB : It would remove inflation, that's for sure. So, yeah, desperate times, I guess. Well, that's really interesting.

IB : Yeah. I was just going to say, we have both Panama and El Salvador and Ecuador actually as well, the three Latin American countries that have pegged to the dollar. And obviously economists debate, but the general consensus has been for countries that struggle to create their own credibility, kind of with governments that aren't good at messaging or aren't good at limiting their spending that the dollar has been an improvement versus having their own currency.

NB : Right, yeah, like I remember, I mean, it's largely for tiny countries. I can remember going to Cambodia and you get, at least when I was there, you put your ATM card machine and you get U.S. dollars out. But that's, you know, Argentina is not a tiny country. Yeah, I mean, they even won the World Cup final. But yeah, anyway, not to talk too much about that. But anyway, yeah, that's very interesting stuff. When is the election?

IB : The first round is in October, and then later this month, and then presumably, there will be a runoff unless somehow the libertarian wins in the first round, which seems unlikely. And so the runoff would be in December.

NB : Very interesting. Okay, so we have that to look forward to. Probably will, I would think, maybe create some opportunities to buy some stuff in Argentina potentially. Yeah, very good. All right, in closing, maybe, Ian, tell us how we can find out more about you? I'll link to that in the show notes as well for people who want to follow you and maybe subscribe to your service. And maybe tell us a little more about what the service does actually. So, go ahead.

IB : As I've had my service on Seeking Alpha since 2016, so 7 years running the main feature. There's a weekly digest where I cover kind of the news of the week, updates on existing positions, and then probably two or three new ideas, like full length deep dives per month on new companies that I'm investing in.

There's two portfolios that I run where I just share what I'm owning. One's a long-term and one's kind of a more trading account. There's an active chat room. There's a lot of very smart people there, quite a few people that work at hedge funds or banks. And so, there's a lot of good information in the chat room. So, that's the main service.

And then obviously, I write a lot on the free side of Seeking Alpha as well. So, I think I've published more than a thousand articles now.

NB : Yeah, definitely.

IB : There's plenty of free stuff to check out.

NB : Very cool. Yeah, we’ll definitely link to that. Very interesting. Ian, thank you so much for joining us here today. Thank you all for listening.

IB : Yeah, thanks for the invite. This was good fun.

NB : Yeah, good fun. Thank you all for listening to the Investing Experts Podcast . Nothing on this podcast should be taken as investment advice of any sort. At times myself or the guests may own positions in the securities mentioned.

You can follow Ian's Insider Corner and Investing Experts on Seeking Alpha, where you will also find full transcripts for all episodes. And to take full advantage of Seeking Alpha, become a premium subscriber. Learn more at seekingalpha.com/subscriptions . Check it out and we will see you back here again next time. Looking forward to it.

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