Companhia Sanea (SBS)

[flatlander_60048]

Listner

Be careful attributing too much of SBS' recent share price appreciation to the drought subsiding. While it is an operational tailwind, the share price movement of the ADR (and all of the EEM) is more closely correlated to the weakening dollar. It is no coincidence that SBS's turn-around began in Sept 2015 when the US dollar peaked. Keep your eye on the $-Real relationship. I suspect that SBS is likely to run to $8 by this summer as you have indicated (this would likely be an all time high share price in the low 30's on a Real basis but far from it on the ADRs).

The US election turmoil is a positive in terms of it weakening the dollar. If the Republicans have a brokered convention and change course to an electable fiscal hawk (say Ryan) get out of SBS. Since the dollar will likely strengthen as deficits and debts become part of the general election discussion). Hillary is probably a baseline with continuation of current policies (muddle along scenario). If Sanders strings together more wins and looks like he could challenge Hillary it would bode for a weaker dollar (since he has proposed numerous social programs that would likely increase the deficit), which would be positive for SBS. On the Brazilian front, the impeachment of Dilma with a move to a more centralist government would strengthen the Real and would be positive for SBS.

I know some of this sounds wacko but we are living in a world where relative currency values are driving the macro trends in far flung areas of the world. Emerging markets are especially levered to these factors.

If you are not worried about the short to intermediate term movements (say next 5 years), I still think the long term demographic conditions favor SBS. They are gaining efficiency (plugging leaks, supplementing water supplies with river diversions and negotiating with non-paying municipalities) to improve operations/financial conditions. They have 5% growth pretty much built in due to demographics and expanding the system to new communities. In a world where growth is hard to find this is attractive.

Regards FL