Brazil Value Talks: Pedro Perin
Multiplied Invested Capital by 30x in 7.5 Years
Today I have the pleasure of interviewing Brazilian investor Pedro Perin
From January 2016 to July 2023, his historic performance will be the envy of anyone.
His portfolio returned more than 3,000% in the period, versus 173% for SMLL (Brazil Small Cap Index).
This guy knows how to generate real value.
Shall we meet him?
BS: Pedro, could you tell us a little about yourself?
PP: I started studying about investing in stocks at the beginning of 2014 (which was my last year of college), and I started investing at the end of the same year. I graduated in Administration from UFES (Federal of Espírito Santo State). After college, I worked in Corporate Finance, Management Consulting and M&A, all in Espírito Santo.
BS: What is the secret to the explosive return on your portfolio?
PP: There are several ways for you to make money in the market. In my strategy I try to make money in a few different ways:
Beta – Understanding the moment in the cycle we live in, and the asymmetry of the stock market as a whole. In the long term, the stock market tends to have a return close to the cost of capital, therefore, the tops and bottoms tend to be similar over time, adjusting the cost of capital (IPCA + Risk Premium for an NTN-B + Risk Premium Equity). The closer to the bottom (in Mar/2023 for example, the SMLL index hit bottom compared to the low in Feb/2016, adjusting the period's capital cost), the higher the portfolio's beta, the closer to the top, the lower the beta . The portfolio's beta also serves as a measure of risk and possible drawdown. In theory, the “potential” drawdown of the portfolio would be: drawdown of the stock market for the last fund (adjusting the cost of capital for the period) multiplied by the beta of the portfolio. A portfolio that, for example, carries a beta of 2.00, with the exchange having a possible drawdown of 50%, could crash.
Asset Turnover – The percentage of equity in an asset in the portfolio should be in accordance with the upside that the asset has. As a stock varies (without changing the target price) it causes the asset to become less/more attractive than previously, making it necessary to adjust the position. For example: You have two shares in your portfolio, both with 100% upside and you allocate 50% of your equity in each. The next day, stock A rises 10% and stock B drops 10%. Without any change in their target price, your portfolio has 55% of equity in a stock with 81.1% upside (stock A), and 45% of equity in a stock with 122.2% upside (stock B). . It would be rational to sell part of share A to buy Share B, making it larger within the equity. In a multi-asset portfolio, there are daily opportunities to make these changes.
Alpha – This is where most of the gain is, which is choosing stocks cheaper than the benchmark. I try to focus my analysis on more cyclical companies. These are generally where the greatest purchasing opportunities appear, precisely due to the volatile nature of the results. There are occasionally opportunities in companies in less cyclical sectors, but it is much rarer. In cyclical sectors, the famous “return to the average” usually occurs. Therefore, to analyze companies like this, it is important to look at an “average” cycle result, to understand its pricing.
Leverage – Here I only use Long & Short, I buy cheap assets and sell expensive assets. When it comes to shorting, I try to look not for the most expensive assets, but for those that have the least risk of going up a lot (given the risk of loss when shorting, which in theory is infinite). Generally short are large capitalization companies, more stable and less cyclical sectors, low growth and with stretched multiples.
BS: Why is your benchmark the SMLL and not Inflation + 6%, or Ibovespa?
PP: Inflation + 6% doesn’t make sense because it doesn’t take asset prices into account. How do you accumulate wealth? Increasing the purchasing power of assets, which is why the only thing that matters is relative performance, as it measures the increase/reduction in the purchasing power of assets. The SMLL or IBOV are asset inflation indices. I use SMLL instead of IBOV because it is more diverse and less concentrated.
BS: What is your process for finding a new purchasing opportunity?
PP: Talking to people in the market, following Twitter, reading releases, reading Seeking Alpha (American website), etc.
BS: How long on average do you hold a position in your portfolio?
PP: There is no deadline to maintain a position. It depends on the upside and that's it. If the stock rises too quickly it can last for 1 week, if it takes too long it can last for years.
BS: How do you value a share: DCF, Multiples?
PP: Varies between DCF and multiple target.
BS: What is the maximum concentration per company and sector that it adopts?
PP: By company 15%, by sector 25%.
BS: Do you prefer to invest in growth or value companies here in Brazil?
PP: For me it doesn't really matter if it's growth or value. What matters is asymmetry. Generally the biggest ones are in Value.
BS: And abroad?
PP: Same thing as Brazil.
BS: In which sectors do you not invest at all?
PP: There is no sector that cannot be invested in. There are very complex sectors that I prefer to stay out of (for example Biotechs in the USA).
BS: What percentage of cash do you usually work with?
PP: It depends on whether or not they have asymmetric assets to fill the portfolio. The normal is 0% cash.
BS: Could you explain what your positions are today?
PP: They vary a lot, because I always adjust according to their variation. The largest in Brazil today are: MYPK3 and SIMH3. Abroad, TNP and BDRY.
BS: What is the cheapest company on the stock market today?