Argentina Gets Risky for a Value Investor

 | Apr 18, 2012 | 11:30 AM EDT
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My Columnist Conversation post yesterday afternoon regarding Argentina's push to seize control of YPF, the nation's largest oil and gas company, from Spain's Repsol (REPYY) and the potential fallout for shares of Cresud Soceidad (CRESY), elicited some interesting reader responses. I would have expected nothing less from Real Money subscribers!

The primary theme that I heard from subscribers was that the suggestion that Argentina might ultimately also nationalize the food industry was a stretch, that there's a big gap between taking over energy and taking over food. I don't disagree with that assertion. However, it still raises some concerns for me.

When I had a position in Cresud, it was with the knowledge that I was dealing with a market that is risky in terms of the overall economic situation and the government's views toward business and regulation. I felt it was important to always keep an eye open to that. Frankly, I believe that was part of the reason that Cresud shares were so cheap in the first place: There was a discount based on geography.

When the markets tanked in late 2008, Cresud fell below $5 a share, putting the company's market cap below $200 million. That seems quite remarkable in hindsight. At the time, the company owned 1.1 million acres, which is roughly the size of the state of Delaware, a large herd of cattle, plus a 42% stake in IRSA Investments (IRS) and a 14% stake in BrasilAgro.

Shares subsequently ran up to $20 by late 2010 as markets recovered, and the company began receiving more attention as investors sought ways to gain exposure to farmland. I closed my position in the $19 range; and there was no magic in timing that trade. I had been well rewarded for owning shares, and getting out near the top was dumb luck. (You might never hear that sentiment from a trader or technician, but value investors tell it like it is.)

Cresud remained squarely on my radar thereafter, and I wanted to own the name again, at the right price. While I've been tempted at times as shares have approached $10, I held off. Now, with the push for the nationalization of YPF and the uncertainty it brings, $10 won't do it. I want to see how the YPF situation plays out, and at this point, there are no signs that the Kirchner regime is backing down.

Repsol, which would be left with a 6% stake in YPF if the Argentine government seizes the intended 51%, will no doubt try and fight this move, but the company's recourse is unclear. Repsol shares fell more than 11% yesterday. Adding intrigue to the story are reports this morning that China's Sincopec is in talks with YPF to buy its 57% stake in Repsol.

As an investor, I am very uncomfortable buying shares in a country where "seize" has become the verb of the day. I still am intrigued by Cresud, and the company's assets, but I need to see how the situation in Argentina plays out. In a less than business-friendly environment where there is great uncertainty, assets are simply worth less, in my view. I need a greater margin of safety to be compensated for what I view as additional risk.

So far, there's been little reaction from Cresud's stock. Shares are down 1.5% since Friday. There may ultimately be no negative reaction, but I need to see how the YPF situation plays out before I'd put any capital back into Argentina.


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