News of the Week (November 25 - 29, 2024)

News of the Week (November 25 - 29, 2024)

11 min read

I hope you’re all having a great holiday and weekend. In case you missed it, I posted a CrowdStrike earnings review earlier in the week.

Table of Contents

1. Nu (NU) – Brazil Macro

The News:

Brazil’s central bank finally issued its long-awaited plan to tackle the budget deficit. It will cut $12 billion in federal spending through 2025 and 2026 in an effort to demonstrate fiscal responsibility and its intention to stick to its commitment of limiting public spending through 2026. The proposal included new salary ceilings for highly paid public employees, tax hikes for affluent individuals and another $860 million in cuts through the end of this year. Interestingly, it also incorporated new tax exemptions for lower-income individuals to curb the economic hit from less federal support. That piece wasn’t liked by markets, as it hinted at Brazil’s leadership simply not doing enough to fix its budget issues. 

Potential Risks:

There were two main concerns coming from this news that led to Brazil’s stock market having its worst week in two years. First, the economic hardship that coincides with lower federal entitlement spending will hit discretionary income and consumer confidence. How sharply this happens remains to be determined. The second issue is that some feel this response is simply not enough. Some analysts called it the “bare minimum” and think more is required. Expectations of borrowing to fund continued large deficits led to more inflationary concern and the Brazilian Real weakening to its lowest point in several years. It also led to JP Morgan raising its neutral interest rate in that nation from 13% to 14.25%.

Taken together, this means a more fragile Brazilian economy, lower velocity of money and more growth challenges for Brazilian companies. This is especially true for highly interest rate-sensitive areas like credit. Nu stock falls into this category.  

My Take:

We need to split this take section into a “long term” and “near term” discussion.

Starting with the long term. I love Nu, its business case and its management team and this changes nothing about my overall optimism. I think this company will keep fixing massive inefficiency in Latin American financial services and will briskly compound the top and bottom line for decades in the process of doing that. The company’s recipe of scaled growth, unique value, fantastic leadership and elite margins is what matters here for the long term. Whether or not Brazilian macro forces are headwinds or tailwinds in any given year is not going to determine if this investment and company succeed over the long haul. Continuing to dominate its markets and delight its customers is what matters.

Zooming out, I think all that this will do is accelerate market share gains as weaker competitors fail against tougher backdrops. Nu will easily get through this with its fortress balance sheet and prudent lending practices. This isn’t a company trying to maximize originations to create a resulting “sugar high”. On the contrary, Nu has periodically proactively pulled back on some credit originations to lean consistently, overly conservative when it deems that to be prudent. It’s building a 100-year company. I’m not fretting over 100 days or 100 weeks of tough macro. Go ahead and coil the spring, Mr. Market. That’s the long term portion of my mindset. 

For the near term, I didn’t add to Nu following these developments. While macro items are noise for the long haul, they matter dearly when zooming in and are clearly becoming more challenging. I absolutely love this company and team, but I also deeply respect macroeconomics. I know that exogenous forces can create irrational buying opportunities that I must give myself the room to buy into. This is predominantly a non-U.S. lender doing most of its business in a country poised for hawkish monetary policy. That will absolutely impact Nu’s Q4 and potentially 2025 results and hurt overall investor sentiment surrounding that region. 

So amid all of this balancing, what is my plan? The same as when I added to it most recently. I will continue to accumulate more shares of this name into more PE multiple contraction. I will also widen the bands of multiple contraction needed to justify adding to account for rising macro risk. Especially considering its continued expansion into riskier credit buckets (going very well so far but always delicate), I think this is the correct approach. Nu the company is going to be just fine. Nu the stock is also going to be just fine eventually, but I would not be at all surprised to see more turbulence ahead. I’m happy if it turns out that my biggest risk here was not owning quite as much as I wanted to.

2. High Fliers

It’s always fun when the conversation shifts to “things are going up too quickly, what do I do?” That is my favorite problem to have, but it’s still a problem. As Max readers know, I’ve done a bit of selling in recent weeks, yet remain nearly 100% invested and have kept the trimming modest. Most of those trims have also simply been reallocated to other names.

Like for Nu in the section above, I think it’s important to continue balancing two ideas here. First, we cannot grow overly complacent or greedy… We cannot let “20x” sales become a normal part of the conversation… We cannot begin to think of ourselves as the next Warren Buffett… We cannot let companies get endlessly more expensive without rightsizing risk. Increases in price alone are not a problem… Increases in valuations are. Rate cuts have a way of making every bull feel brilliant, and that must be understood.

But at the same time? Valuations for most stocks don’t look nearly as stretched as they did during the pandemic bubble. It warms my heart to see investors arguing over how fair 40x earnings is for Nvidia (growing EPS 40% Y/Y) rather than how fair 40x sales was for Shopify three years ago. These conversations are undeniably much healthier and far less concerning. Furthermore, we aren’t gearing up for overly restrictive macro policy, stimulus hangovers and supply chain chaos. Instead? Today, we are poised for gradual rate cuts, healthy supply chain and inventory dynamics, continued full employment and expectations of domestic economic deregulation. The setup is easily more favorable.

We also have to remember that many of the names exploding higher today are recovering from ridiculously low multiples (some had negative enterprise values). Shockingly (I say as sarcastically as I can), investors are realizing that all of these models assumed to be zeroes weren’t actually losers.  They were simply hibernating. They were awaiting the slightest hint of an easier Fed to re-accelerate the growth engines, access better liquidity, take advantage of falling cost of capital and enjoy brighter sentiment. They were, as I’ve said so many times, coiling springs where earnings were growing and stock prices were contracting until sellers capitulated and the spring (stock price) was ready to snap back.