Weekend Digest #282 (Endava, Walmex, Diageo, Aval, Buy And Hold Portfolio)
Despite a market at new all-time highs, there's a lot of great companies on sale right now.
Summary
IT consultancy companies pop following Accenture's AI surprise. This should be the turning point for companies like Endava as the market prices them as AI winners.
The market is confusing a cyclical pattern for structural decline in the spirits industry, creating incredible value at today's prices.
I'm buying Walmart Mexico again on its recent dip. Here's why.
The rest of the buy-and-hold purchases for this month including some commentary on CRL, AVAL and others.
IT Consulting/Outsourcing Shops: We've Turned The Corner
I've been banging my drum for Endava (NYSE:DAVA), EPAM Systems (NYSE:EPAM), and Globant (NYSE:GLOB) for months now and that's been a premature call, to say the least. However, it seems we are now at the turning point where the thesis will play out. Here's why.
The fundamental difference between my view and the market's view is that I believe AI and other cutting edge technologies benefit Endava & friends, whereas the market believes AI is an existential threat to these companies.
In the market's infinite wisdom, Endava's customers (think regional banks, insurance firms, brokerages, private equity managers, etc.) are going to download their own AI tools and code from the internet and deploy them willy-nilly across their (often decades old) existing tech stacks, making IT departments and associated consultants obsolete. This sounds incredibly stupid as I'm typing it out, but real people with a lot of assets under management actually think this.
If you're an Amazon, Meta, Tencent or whatnot, sure you can build your own bespoke AI systems and ecosystems. No problem. If you're the largest bank in the state of Missouri, however, it's far less likely that you're going to trust unvetted AI-generated code to safeguard your bank's deposits and protect the firm from security threats.
Particularly for Endava, where close to half of revenues from financial businesses of one sort or another, the clients are not technologically sophisticated and there are also catastrophic errors for messing anything up. As such, these sorts of customers tend to have old IT systems, preferring a sure thing that is reasonably functional rather than a new system with better efficiency but potentially riddled with bugs.
If the Bank of Missouri wants to experiment with implementing an AI chatbot to help customers or building an AI model to screen potential loan applicants, it is going to hire someone competent to help them build this functionality. That's for two reasons.
One, Endava already has a long track record with Fortune 500 customers of building working solutions -- it's largest long-running customers are Mastercard and several large European banks, which are certainly the sort of enterprises that require quality IT systems, and which serve as credibility markers to other potential customers.
Two, you don't just hire Endava because they can build you a working next-gen tech solution tailored to your enterprise's unique circumstances. The other thing they bring you is accountability.
Most of Endava's customers are in heavily regulated industries. You have to comply with a million government checkboxes around safety, privacy, data compliance and so on. When you hire Endava, you can now show regulators that you have a reputable operator building and helping maintain your underlying IT systems. And in the event something goes wrong, the company can call up Endava and have them make it right -- like with consulting more broadly -- you are paying for someone to take responsibility/accountability and help check boxes and comply with regulatory requirements.
In the world of Silicon Valley, where companies like Uber were built around the ethos of "move fast, break stuff" and laws were merely a distraction, this sort of thinking might not make sense.
But in fields like insurance and banking, rest assured that no one is going to risk their jobs betting on some untested AI system -- rather, you bring in proven consultants that have tons of expertise implementing them.
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All this leads to this week's excitement around the central question: Are these companies AI winners or AI losers?
My view is that they are inevitable AI winners because tons of firms in non-tech industries will hire the likes of Endava/EPAM/Globant to implement cutting-edge tech solutions. Also, remember that within the digital transformation niche of IT, the trio (EPAM, Globant, Endava) have more than 50% market share among the major vendors. Sure, you have firms like IBM and Accenture that are also in the space, but they are far broader consultancies and spend much of their time and energy maintaining legacy systems rather than having a hyperfocus on cloud and other next-gen solutions.
Speaking of Accenture, however, that's what sparked today's discussion.
Accenture reported earnings last week, and actually missed on the numbers and offered merely in-line guidance. Despite that, the stock shot higher on the earnings results because of -- wait for it -- AI.
Namely, Accenture reported that it has now booked more than $2 billion in revenues tied to generative AI and that its backlog and new customer acquisition tied to AI solutions are rapidly picking up steam. As noted above, Accenture is hardly the sharpest knife in the drawer when it comes to tech like AI. Yet even for them, this technology is already important enough to move the needle.
Accenture shares rallied 9% on this AI-related excitement. Interestingly enough, it was not Accenture that got the biggest pop in the space -- rather it was Endava, whose shares jumped 16% on the Accenture AI news.
Think about it for a minute. Accenture does $65 billion a year in revenues. $2 billion in AI bookings is nice for them, but it's still low-single digits portion of their overall revenue. Accenture has a lot of boring cash cow legacy tech operations over there which dilute the revenues from more exciting stuff.
By contrast, Endava is the smallest and fast-moving player in the space; it had grown EPS 29%/year compounded from IPO through 2023. If there's money to be made deploying AI solutions for Fortune 500 companies, Endava will eat a large piece of that pie. If you already see legacy firms like Accenture and IBM getting a pop from AI, you'll see a torrent of new business for the digital transformation specialists in coming quarters.
Oddly enough, Accenture is selling at 26 times forward earnings, despite its slower-growing profile. Endava earned $2.05 per share in 2023 and is trading at $28 now -- 14x last year's earnings. And, recall, it had grown earnings 29%/year compounded from IPO through 2023. Do I think they will grow 29%/year long-term? No, I do not. But management has guided to 20%/year growth for at least the next five years, and that target seems eminently reasonable, especially if they continue to be aggressive on the M&A front. You don't need me to write at length about the sorts of returns we'll get from buying at stock at 14x earnings that grows at 20%/year.
Buy & Hold Portfolio June Buys
First: A Brief Word On The Overall Market
While the major US stock market indexes are at new all-time highs, excluding the Russell 2000 small caps, there is a surprisingly long list of reasonably high-quality companies selling it 52-week lows, and in many cases even back to levels seen in March 2020 or the mid-2010s.
The overarching question is whether this discrepancy resolves itself by having breadth improve -- that is to say that the lagging stocks catch up to the indexes. Or, the other possibility being that we get a correction or bear market, where everything goes down, led by the momentum names, but quite possibly also including the rest of the market.
Personally, I don’t have much confidence in the market being able to hold near current levels. So, my focus is on picking up defensive stocks that are both objectively cheap on an absolute basis, along with being companies that can perform well in a falling interest rate/recessionary environment.
The last couple months of economic readings are certainly pointing toward a significant economic slowdown in the United States.
Unemployment in particular is starting reach the level of velocity where it is unlikely to stop rising before causing a major market stumble. Specifically, unemployment is now up 0.6% from the recent low point. The last cases where U.S. unemployment has risen at least 60 basis points from the prior low were:
Early 2020
Late 2007
2001
1990
1979
1974
All six of these were decidedly unfortunate times to own U.S. stocks, with the market subsequently heading sharply lower. The best of these outcomes was 1990 when the market dropped only 18%. In other words, a spike in unemployment is a major red flag for investors.
The market enjoys a brief moment of peak euphoria when inflation is controlled and the Fed can confidently turn to easier monetary policy. But then people realize that the Fed is having to slash rates because the economy is grinding to a halt.
Turning back to 2024, there isn't much help coming from overseas, either. Many global economies are already in recession or are at best sitting around flat GDP growth year-over-year. China, Europe, and Latin America all see sluggish conditions and a generally downward trend in activity.
The above discussion doesn’t just consider the United States, either. We’ve seen European equities get hit over the past month with France falling 10%, for one example.
Emerging markets have also lost steam. There's been a correction across Latin America -- Mexico most obviously, but also Brazil, Colombia and so on. The rally in China has petered out. The U.S. market shows little sign of passing the baton to anywhere else; as its economy finally slows down, things could get interesting for equities more broadly.
What I'm Buying This Month
Thus, my preference is for playing defense and that that unsurprisingly leads us to a focus on consumer staples stocks for the buy-and-hold portfolio. Here's what I'll be picking up this month:
Hormel Foods
Endava
Ambev
Brown-Forman
Diageo
Grupo Aval
EPAM Systems
Verisign
Wal-Mart Mexico
Duckhorn Portfolio
Charles River Labs
Given the recent selloff in Hormel Foods (NYSE:HRL) following its latest quarterly earnings report, Hormel once again becomes my preferred dividend investment for the portfolio. The market reaction to earnings was silly.
Management had already told us Q1 was going to be weak, and numbers were in-line with expectations. The company is prioritizing recovery in its profit margins rather than cutting pricing to drive revenues. This was all known and well explained in advance.
Previously, Hormel stock had shot up 20% on its Q4 earnings numbers with the first signs of the margin recovery story taking hold. At that point, we saw that the company had turned the corner but that the recovery would be mostly in the back half of 2024 and into 2025. Management subsequently hit its (low) guidance for Q1 and the stock sold back off 10%. Despite the price gyrations, there's been little actual new news here, and the valuation is back into deep discount territory.
Beer & Spirits Stocks
That leads into alcohol and spirit stocks sector. These companies are in absolute fire sale territory right now. The valuations on these names are near the lowest levels seen since I’ve been a professional investor. Just absolutely silly prices for these stocks. Long-term investors that buy-and-forget about these companies for the next five or ten years so going to be exceedingly happy with their returns.
I'll start off this discussion by noting that I carry out numerous expert calls for AlphaSense/Tegus and there isn't much concern from industry insiders about the outlook.
When talking to industry insiders, you hear much more about inflation, supply chains, and weakness in emerging markets than anything about GLP-1 drugs or people not drinking anymore. The actual people with boots on the ground in the industry are working through an economic cycle, whereas the fund managers in New York have invented a bunch of narratives about the spirits industry that are only loosely associated with reality.
Brown-Forman (NYSE:BF-A, BF-B), Diageo (NYSE:DEO), and their peers are working through excess inventories. Particularly in markets like Latin America and the Caribbean, where 2021-2's economic growth decelerated more quickly than people expected. Take Diageo for example. They had 25% year-over-year sales growth and LatAm and the Caribbean recently, and now this year they’re looking at something like -20% from the same region. While the volatility is dramatic, the net effect of a +25 year followed by a -20 is no big deal overall, though you wouldn't know it from looking at the stock prices across the sector lately.
Last year, LatAm spirits distributors were looking at double digit GDP growth figures in various countries across the region and overordered supplies based on that positive trend. Now that economic growth has gone down to nearly zero across much of LatAm & Caribbean (remember, the world ex-US is already teetering on recession territory) now distributors are cutting back activity. Industry experts see similar effects in Asian emerging markets. This is classic bullwhip effect stuff that is common in cyclical industries.
Normally, alcohol is not a cyclical industry -- people drink roughly the same regardless of economic conditions.
That said, the pandemic caused a massive chunk of bars and restaurants to shut down, and many never subsequently reopened. A big chunk of drinking shifted from on-premise consumption to drinking at home, and people also changed purchasing habits (such as beginning to order through apps and delivery services) during the pandemic. None of this is a permanent impact to the industry -- global alcohol sales hit new record highs in 2023 and will make a higher high in 2024. But we saw decades worth of changes in specific consumption patterns and consumer preference within a four-year period, and so it's understandable why the usually non-cyclical industry is currently working through an unusual level of volatility.
Again, none of this is due to GLP-1 drugs or "young people don't drink anymore" -- the real story is a lot more mundane. But mundane business observations don't go viral on Twitter in the same way that farfetched narratives do.
The one actual caveat I'll add here is that the premiumization trend does add some cyclicality to the industry. The current industry motto is "better liquids, not more liquids". To explain, overall alcohol sales by volume aren't going to rise much, if at all, in the future. Given falling global fertility rates, rising consumer focus on health, and already high levels of alcohol consumption per capita in many markets, the industry isn't expecting to grow from selling more drinks per year. (This is a distinct difference, however, from something like cigarettes which are in active persistent decline).
So how are we going to get our clockwork 7%/year EPS growth from Brown-Forman and Diageo if overall alcohol sales are only growing at, say, 1%/year. If you said "pricing", you are correct.
It's only a matter of time until distributors figure out where demand levels are and buying patterns normalize.
Until we get there, the market is going to remain panicky. And unfounded narratives will rule the day. Folks will keep claiming that "people don’t drink anymore", which I’ve already debunked in previous articles here. And there's the GLP-1 weight loss drug story, which is a real problem for macro beer but is a virtual nonfactor for premium wine and spirits.
You also have to separate the industry-specific things from the broader factor that consumer staples stocks simply can’t catch a bid.
Many consumer staples stocks are de facto bond alternatives. Diageo (via Guinness beer) has been in business since the 1700s. Many of its leading brands have existed for a century or more. When you buy Diageo you are buying an infinite duration bond that pays out cash flow from humanity's love of partying and relaxation. In a world of zero interest rates, that starting 6% earnings yield off of infinite duration spirits brands is incredibly valuable. Right now, when risk-free paper yields 5%, Diageo's 6% is significantly less appealing.
I’m won't go through the whole argument on what the terminal P/E ratios/earnings yields for staples stocks should be today. A lot of smart people have very different opinions on that question.
I’ll just say that the market is currently making a massive mistake in one direction or the other.
If you think interest rates are going to stay at 5% or higher permanently, then I'll grant you that staples stocks may be only slightly undervalued here. If you can get 5% risk-free forever, 6% starting earnings yield and 7%/year growth in perpetuity from Diageo beats bonds, but it's not a no-brainer decision after accounting for equity risk, volatility, etc. If interest rates go back down, however, Diageo will blow the doors off of fixed income.
But let's assume high rates are permanent. So Diageo is only slightly undervalued in that universe.
What's the matter? The S&P 500 is dramatically overpriced if we assume high interest rates in perpetuity. In this universe of high rates forever, Apple and other no growth mega-cap companies should be trading 30-50% lower.
If you buy Apple here, you are betting that interest rates are crashing back to zero soon. How else are you going to outperform buying an ex-growth stock at 32x starting earnings (3% earnings yield) when you can get 5% at the bank with no risk? If the market truly believes interest rates are going to stay high forever, you are locking in guaranteed losses (compared to fixed income) buying Apple and other similar high valuation, low-to-no growth stocks at today's prices.
I would rather buy stuff that is already priced as if high interest rates are a permanent new feature. If interest rates stay up here, we still get reasonable returns from Diageo/Brown-Forman/Hormel/etc.
And if interest rates plunge again, we get a fat right tail upside as valuation ratios on bond proxies expand once again. And if there’s a significant recession -- then the Fed cuts interest rates back to zero and the dividends from our staples companies will be highly prized once again. Remember in 2020 when our aggressive portfolio owned stocks like Hormel that we were able to sell at new highs to in turn buy airport stocks that had sold off 60%? That's why you want the portfolio insurance that consumer staples stocks offer.
Most people buy staples stocks after a recession starts and then complain when they underperform. Like with umbrellas, the time to buy them is when it's still sunny outside.
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Before leaving the alcohol section, let's mention Ambev (NYSE:ABEV) as it's a deep value buy this month. Ambev is the Brazilian subsidiary of Anheuser-Busch InBev (NYSE:BUD) for most of South America. 3G assembled it, and it was their springboard to later (significantly less successful) ventures.
Ambev shares soared from around $0.50 to nearly 10 bucks each during the Brazil/Latin America boom during the 2000s. Once the Chinese commodity supercycle ended, however, Brazilian stocks plummeted again -- and Ambev stock has been trading in the $2-$4 range for many years now. In addition to Brazil's macroeconomic issues, many investors discard Ambev due to guilt-by-association with its corporate parent.
But, to be clear, these are very differently run operations. For one thing, Anheuser-Busch Inbev failed to work in large part due to taking on too much debt (more than 6x EBITDA at one point). When beer profits plateaued, that left BUD on a slippery slope. The combined effects of the pandemic and higher interest rates would tip things over the edge and cause a massive wipeout in BUD stock.
And while I push back against the mistaken narratives against the alcohol industry as it pertains to wine and spirits, there is a real problem in the beer market. Macro beer consumption (per capita) peaked more than 25 years ago, and the decline hasn't shown any signs of slowing down recently. Between craft beer, low carb diets, weight loss drugs, and consumers swapping beer for spirits, macro beer is the one part of the alcohol industry that has real structural problems.
So, at six times leverage, a small decline in AB-Inbev's business ended up being an existential crisis leading to a dividend cut and share price collapse.
Ambev, by contrast, is a totally different animal. For one, it maintains a net cash position. It also operates primarily in South American markets with very little competition.
Ambev has more than 60% market share in Brazil and Argentina and more than 90% market share in several smaller Latin American countries.
There are risks to beer consumption across the world. However, these risks are taking far longer to play out in Latin America than in the United States. You don’t have hundreds of craft breweries in every Latin American country in the same way that you seemingly do in every U.S. state nowadays.
You have some shift from cheap beer up to higher priced spirits -- that’s a big chunk of the Brown-Forman bull thesis in fact. B-F is betting big on LatAm and Mexico in particular as emerging markets are the last great volume growth opportunity for the industry.
That said, the average wage in Brazil and much of South America is in the $8,000-$10,000 range annually. Thus people in middle and lower classes are still going to drink a lot of macro beer regardless of what else is going on with their lives. Aside from the tiny elite crust of society, South America isn't wealthy enough to have a wholesale switch from 75 cent beers to $100 bottles of whiskey anytime soon. That's in sharp contrast to the U.S., where many people only drink high-end products nowadays, cutting out low-quality high-carb beers for health or class reasons.
Ambev also didn't wade into social issues -- it avoided the sorts of controversies that led to boycotts and a steep sales decline for AB-Inbev in the United States last year.
All told, South America still retains the favorable industry dynamics that made mass market beer such a profitable business and the United States and Europe 20 or 30 years ago.
Admittedly, Ambev has been an absolute dog over the past couple of years. Economic problems in Brazil along antipathy for consumer staples in general have led ABEV stock to sell off to the pandemic lows again.
At this price, ABEV stock is going for less than 12 times forward earnings. Given the clean balance sheet, it's even cheaper than it looks. Ambev has a variable dividend policy, regardless it pays most of profits to shareholders -- the dividend is generally above 5% annually.
I'm hardly a Brazil optimist by any means and its current government is failing to live up to my already modest expectations. That said, sentiment around Brazil is negative at the moment so the bar for an upside surprise is pretty low. Meanwhile, Ambev operates in many other LatAm markets, some of which are currently more promising. Argentina, for example, could enjoy a boom thanks to the combination of the Milei government and the end of hyperinflation in that historically volatile economy.
Buying Walmex Again
Switching to Mexico, I am adding to the portfolio position in Walmart Mexico (OTC:WMMVY) (Mexico:WALMEX) shares. This has been a holding in the buy-and-hold portfolio since mid-2020, and the stock was up about 70% from that entry point until the recent share price dip. I had figured the stock had run away from me, but with the correction, it's back on my radar.
My original thesis for Walmart Mexico "Walmex" was that Amazon was much slower to take over the Mexican market compared to the U.S. Walmex was already well-positioned heading into the pandemic for digital business. Pre-2020, it already had online, delivery service and WhatsApp-enabled ordering, and it had deployed order online, pick up at store options for hundreds of locations.
With all this operational prior to March 2020, it meant that once the pandemic hit, Walmex was able to take a large amount of share from other grocers, traditional markets, and corner stores while solidifying its position in Mexico's emerging e-commerce market. Specifically, Walmex was reporting more than 200% year-over-year sales growth in the e-commerce channel during the early days of the pandemic.
The e-commerce market in Mexico is a competitive three-way fight between Amazon, MercadoLibre (NASDAQ:MELI), and Walmex. That's in sharp contrast to the United States where Amazon is effectively a quasi-monopoly and everyone else is fighting for scraps.
And there's more. Don’t forget the Walmex is also the operator of Walmart Central America. Walmex has dominant operations in markets like Guatemala and Costa Rica, where there’s even fewer relevant e-commerce competitors than in Mexico.
Turning back to the core Mexican brick and mortar business, Walmex is larger in Mexico than Walmart is in the U.S. By some estimates, Walmex single-handedly accounts for 3.5% of the entire Mexican GDP figure, and it is the country's largest employer.
Walmex isn't just Walmart either, it also operates 168 Sam's Clubs in Mexico along with a variety of other grocery store brands under different labels that give the idea of more competition in the market than there actually is.
In addition to its dominant market position, Walmex is more insulated from competition due to having multiple brands. It can target everything from low-end shoppers at its smaller trademarks on up to upper class consumers at its nicer stores. Furthermore, given Mexico's income status, you have far less high end "Whole Foods" style competition that would siphon off the least price sensitive/most profitable of customers.
Why buy Walmart Mexico stock now instead of any of the other Mexican companies I talk about more frequently?
Shares have pulled back almost 20% (in dollar terms) due to the Sheinbaum election result, which as I wrote previously doesn't make much sense. It makes even less sense for Walmex specifically.
It’s hard to think of a business that will be less impacted by the new government than essential retail such as grocery stores.
In fact, people normally rotate into these sorts of stocks during uncertainty. For one topical example, between the U.S. equity market peak in 2007 and March 2009 low, there was just one stock out of the Dow Jones 30 index components that went up. You guessed it, it was Walmart.
If you’re worried about near-term uncertainty in Mexico, Walmex is the obvious blue-chip stock to hunker down in. It's the largest company in Mexico (both by size and market cap), it is 71% owned by Walmart US so incentives are highly-aligned for U.S. shareholders, and the business is as recession-proof as you're going to find.
From a price perspective, the U.S. listing has been at $37 give or take $5 since 2022. This sudden drop represents a large move compared to its usual level of volatility and puts it at the bottom of the multi-year trading range. Shares are below 20 times earnings and offer a 6% dividend yield as well. For a company that grew sales 8% annualized and EBITDA 9% annualized over the past decade -- a slow period relatively for Mexico's economy until 2022 -- the valuation is hardly demanding from here.
Other Buys For The Month: CRL, AVAL
What else am I picking up this month? Charles River Labs (NYSE:CRL) is back in the buy zone. This is one of my favorite long-term ideas and the recent correction has valuation back to a compelling level as well.
We’ll see far more spending on biotech over the next decade, there have been so many breakthroughs over the past decade in terms of new drug discovery methods which lead to new frontiers for the sector.
Combine with aging demographics (both in the U.S. and worldwide) and demand will be there for breakthrough therapies. Right now, Wall Street only cares about the visibility around the exact timing for when biotech spending will come out of its current trough and return to growth. I'll leave the quarterly earnings result guessing game to others, however.
The story here is a simple one. Charles River consistently grew around 15%/year prior to the pandemic. It saw supercharged growth for a time due to COVID-19 testing and vaccine development efforts. As the pandemic revenues disappeared it went from well-above-average revenue growth to no growth and the stock got puked, dropping 60%. Anyone that zooms out, however, can see that the long-term trendline remains up 15%/year, and the pandemic-related cycle should not outweigh the longer-term secular growth in biotech research spending.
I can't tell you for certain whether Charles River will be back toward usual growth by the end of 2024 or if the recovery will be more of a mid-2025 story. What I can tell you is that Charles River is selling at 15x estimated 2026 earnings, and the current analyst estimates are probably too low. The stock has all the makings of a multi-bagger from here once folks realize the pandemic didn't change the company's long-term growth rate, and that 15x earnings is a silly low price for a company that grows 15%/year and earns revenues from 80% of all drugs that ultimately get FDA approval. This is the ultimate biotech picks and shovels company selling at a frankly silly price.
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Rounding out this month, there's Aval Group (NYSE:AVAL), the Colombian financial holding company. Aval shares are back to 52-week lows which is rather interesting, as the other major U.S.-listed Colombian Bank, Bancolombia (NYSE:CIB) still has a decent-looking chart:
The elevator pitch is that -- even factoring in the spin-off of Aval's Central American business a couple of years ago -- Aval is trading near its all-time lows in both share price and valuation.
How low should the price-to-book value ratio go on an oligopolistic banking firm that averages a low teens return on adjusted equity ratio? Using the general divide by ten rule of thumb, a bank that can spit out a 14% ROE over a normal economic cycle should trade around 1.4x book, which is indeed where Aval was roughly for most of the late 2010s. Now it is at 0.6x, which implies nearly 150% share price upside back to a normal valuation.
On an earnings basis, shares are going for less than 7x forward earnings, even with earnings currently being depressed. (The bank averaged 75 cents per share in earnings in recent years, and then spun off a third of itself with the divestment of the Central American operations, implying closer to 50 cents earnings power on its remaining operations -- 4x normalized earnings at the current price.)
In addition, Aval is also paying a 9% dividend (with monthly distributions). Other Colombian equities have fared alright over the past year, which makes Aval's situation so interesting.
I’ve explained the reason for the discrepancy before in fact, we sold Aval in the in the aggressive portfolio last fall and switched that money into Bancolombia (NYSE:CIB). That swap has outperformed by 30% so far, so that's been a nice outcome, and it came for the reasons I previously noted.
Particularly, while Bancolombia has professional outside management, Aval is still run by a wealthy billionaire and his family. Aval's head hates the current left-wing president, and the feelings there are mutual. Colombia's president has tweeted out specific negative attacks on Aval, and his recent pension reform plan will clip Aval's asset management profits while having less impact on competing banks like Bancolombia or Davivienda.
Aval's diversification means it owns or has stakes in various industries such as energy, infrastructure, and tourism that could be more exposed to economic volatility in Colombia. Whereas, Bancolombia is a traditional retail bank and investment bank. Bancolombia also has its Fintech platform (digital wallets, mobile payments, money transfers) which a third of all Colombians use. As I discussed last year, Bancolombia has been better situated for where the economic and political system is today.
That said, Bancolombia has already rallied over the past six months whereas Aval shares are back on the lows. I'm not sure Aval is a 2024 story; I'm not flipping back from CIB to AVAL stock in the aggressive portfolio yet -- but it's hard to resist picking up some Aval at sub-0.6x book value in the buy-and-hold portfolio. Once the 2026 Colombian presidential election cycle starts up and people start looking at Aval's economic sensitivity as a positive factor, it's not hard to see shares trading back above book value fairly quickly. And the dividend yield is tremendous from this starting price as well.
Any thoughts on EXTO at the current price?