When entering the site and if cookies are prevented from being saved, a message must be displayed
in a popup message box informing the user that their local browser settings are preventing
cookies from being saved and that cookies are required for the site to work. Exact text
to be provided for UAT. On OK click of the message, the user should be redirected to
the global landing page (currently ssga.com).
The Fundamental Growth and Core Equity team’s research process focuses on five key attributes that are likely to lead to sustainable growth. Viewed through the lens of that research process, the Latin American ecommerce firms Magazine Luiza and Mercado Libre are two stocks to watch.
Stock performance dispersion is high in emerging markets (EM), and this trend has increased in an environment of slow global economic growth combined with high uncertainty caused by the COVID-19 pandemic. Companies that offer consistent, higher-than-average growth are valued at a premium versus the market.
The Fundamental Growth and Core Equity (FGC) team’s research process, which helps to identify these investment opportunities, focuses on five attributes of a company that are likely to lead to sustainable growth. These attributes are qualitative and forward-looking; our assessment is based on the expertise and judgment of our analysts and is therefore unique to the FGC team.
The Ecommerce Sector
One example of strong outperformance in emerging markets across several countries has been the ecommerce sector. Ecommerce is seeing secular growth that is expected to continue, especially in Latin American countries, where the channel is still in an early stage of development. The pandemic has fast-tracked consumers’ migration from brick-and-mortar retail to online retail, accelerating the secular growth trend. On the other hand, this shift has tested the strength of companies’ business models and ecommerce ecosystems.
Magazine Luiza and Mercado Libre
Two clear success stories in Latin America have been Brazil’s Magazine Luiza and Argentina’s Mercado Libre, the main ecommerce players in the region.
Mercado Libre and Magazine Luiza have strong market positions because they have been consistently building a sustainable competitive advantage over other ecommerce companies. Their most notable advantages are large investments in logistics networks, a wide product range, and effective inventory control. Mercado Libre is the lead player in the consumer-to-consumer segment, and it has been gradually gaining share in the business-to-consumer segment and official stores. In addition to digitizing its own business, Magazine Luiza launched Magalu-as-a-Service, which onboards offline merchants into its ecommerce marketplace platform.
As these two companies consolidate their market positions, they are moving the barrier to entry higher for any new ecommerce entrants, especially in Brazil. Neither feels threatened by their largest suppliers, given their platforms’ large number of sellers and increases in product assortment.
The Role of Management
The management team is crucial for the success or failure of a company. Visiting companies’ headquarters is an important part of the analysis conducted by the FGC team, and we spend substantial time with senior management to understand their challenges and opportunities as well as the culture of their company. The management teams of Magazine Luiza and Mercado Libre have displayed clear and effective strategies as well as solid execution track records in recent years.
The pandemic forced Magazine Luiza to close all its physical stores (normally representing 50% of revenues) in March, and the stores remained closed through most of the second quarter. Initiatives implemented by the management team included ship-from-store, faster onboarding of new merchants, increased new product assortment, and cost-cutting actions.
Mercado Libre did not face the same level of disruption as Magazine Luiza, as its business is all online. However, Mercado Libre did rely heavily on electronics sales, a category that experienced a slowdown during the pandemic. Mercado Libre quickly broadened its product range, among other initiatives.
Another advantage that Magazine Luiza and Mercado Libre had over the competition when the pandemic hit was their financial condition. Both firms are well-capitalized, having raised capital in 2019. Responding to the pandemic, several competitors were forced to rush to banks to borrow in the short term at expensive rates. Seeing an opportunity, Magazine Luiza has been making small acquisitions to expand its digital capabilities, while Mercado Libre has increased its employee base, mainly in logistics, to enhance customer experience.
The fundamental momentum in the Latin America ecommerce sector has been a surprise this year. Despite all disruptions caused by COVID-19, Magazine Luiza’s revenues in the second quarter were up almost 30% year over year; also, earnings came in much higher than market expectations. Mercado Libre’s revenue growth was up 60% year over year in the second quarter, which also represented accelerated growth versus previous quarters. Both firms’ rapid management reaction to never-before-seen external events enabled the companies to deliver much stronger than expected results, not only in 2Q20, but also very likely for the years ahead. It also confirmed to investors that strong management teams were executing innovative strategies.
Transparency, or visibility of the business model, can sometimes be tough in ecommerce. The business is constantly evolving, the relevant performance metrics change more often than in other sectors, and companies can face earnings pressure for long periods during investment cycles. For example, in 2018-2019, Mercado Libre’s EBITDA margin turned negative – declining from the mid-twenties – due to large investments, mainly in logistics and fintech business. Investors’ ability to analyze the right performance metrics during these periods can be critical.
Mercado Libre has become a leading ecommerce player in the major countries of Latin America, while Magazine Luiza has successfully migrated from being a bricks-and-mortar retail player to one of the leading ecommerce companies in Brazil. A consistent investment process helps the FGC team in our investment decisions, especially in identifying the companies and business models that will be the market winners. The biggest challenge of investing in ecommerce stocks is measuring the earnings growth potential, not only in the short to medium term, but also in the long run.
This information should not be considered a recommendation to invest in a particular security or to buy or sell any security shown. It is not known whether the securities shown will be profitable in the future.
For use in EMEA: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Important Risk Information
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Investing involves risk including the risk of loss of principal.
The views expressed are the views of Fundamental Growth and Core Equity through September 24, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The trademarks and service marks referenced herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.