Chit Chat Stocks - Should You Buy Mexican Stocks? (ALSEA, AGUA, PAC, OMAB)

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Starting point is 00:00:43 investing. Options are not suitable for all investors and carry significant risk. Full disclosures are in the podcast description. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Okay. Welcome into Chit Chat Stocks. This is our Wednesday episode. And as we like to mix things up, we have an interview today with someone who's been on the show before, Ian

Starting point is 00:01:34 Bezek, author of Ian's Insider Corner, covering a plethora of value stocks, as we just talked about before hitting record. It's finding opportunities where they are, but there is a big focus. I would say he is an expert on Latin American countries and investing in Latin America, Mexico, Colombia, various other spots. But today we're focusing on Mexico. We're going to get a quick update on the country. I think the title might be, Is Mexico Investable? Something along those lines. So we're really going to hit that. There was the election. There's been big peso movements. There's been the reshoring theme. We're going to hit all that. But Ian, welcome to the show. Maybe first question, what are the big misconceptions about

Starting point is 00:02:24 investing in Mexico and countries south of the US border? Yeah, thank you for having me back on the show. I really appreciate it. I know we talked about some Mexican stuff before, and I know a lot of people are having some skepticism right now. So I appreciate you guys making the invitation, giving me a chance to stick up for the Bulls here during this moment of shaking confidence. Misconceptions. I think people think the crime situation is getting worse, whereas in reality, the homicide rate has gone down each of the past four years. Obviously, Mexico has more crime than anyone would like. But I don't see how anything has happened in 2024 that would change the investment outlook on that front.

Starting point is 00:03:09 People say the new president-elect is going to be a crazy leftist. In reality, she was very close to the outgoing president who led the Mexican economy very well over the past six years. The consensus among economists and among the Mexican media is that she's going to be more of the same. And so if Mexico was investable since 2018 when AMLO was in power, the baseline assumption would be that she's going to carry on the same level of governance. which has good points and bad points, but I don't understand the crisis reaction from a breath. So I'd say that's probably the two biggest things people have been worried about. All right. And we're going to definitely hit that. That leads right into the first topic here,

Starting point is 00:03:54 the Mexican election. I forget, I think it was in 2024 or earlier this year. Either way, it was recent. What happened? What do investors need to know about this new administration coming in yeah it's true so mexico six-year election cycles um with no re-election so amlo the outgoing president was elected in 2018 he governed through 2024 he was exceptionally popular his approval rating was usually around 70 and so he said that my successor is going to be claudia scheinbaum and she was above 50 in the polls the whole election cycle there was never any serious opposition to her and then on election night she won handily i think she got 58 of the vote so it was just simply never a competitive election and when it was popular people were

Starting point is 00:04:43 happy with the progress he made and then i believe the election was the first week of june she won and then we've kind of seen the market uh the market initially skidded lower then there was a decent bounce but now it's gotten even lower but she doesn't actually take office until the end of november so there's a long transition period for people to to kind of discuss what her policies may be and what are the now you said that stocks have fallen because of this there's this narrative out there that she'll be bad for business and stuff like that that she's a crazy leftist i guess from what i read about it if you kind of read you know just the details of her life and what she's done in mexico city i think the things i read is that mexico city when she was

Starting point is 00:05:30 the mayor crime came down a ton and then she also has unlike this other um prior president who's still in office right now she actually has spent time in the united states and and speaks english so there could be maybe a better relationship with the united states but what are the negatives and why do you disagree with them yeah that's correct she studied at stanford i believe in california for four years she has a very good grasp of english uh when when biden called to congratulate her uh she got rid of the translator and said i can do this by myself so that's a nice sign emma the outgoing president did not speak good english he refused to travel outside of mexico and so all foreign dignitaries had to come visit him emma was a very 1980s style latin

Starting point is 00:06:16 american populist leader that really was not all that interested in diplomacy and international affairs um and i think he governed the country all right despite that but that was a significant negative that he was not interested in the global community and kind of his diplomacy with trump was like i like trump because he's a strong leader and i'm a strong leader so therefore we do stuff but i think scheinbaum will take a much more uh pragmatic kind of neoliberal approach to policy making and seek to incorporate a lot more uh global opinion and influence into our approach a big concern around her is that she's a climate scientist she studied environmental engineering i believe and so people just hear that and assume that there's just going to be a disaster

Starting point is 00:07:01 in terms of her economic policy but like you said she was the mayor of mexico city her policies were reasonable and she focused on stuff like lowering traffic like alleviating traffic congestion to reduce smog which is i think something that people would say is a reasonable way to fight uh climate issues rather than some sort of crazy approach um let's see yeah i just oh and another big issue is with the oil company mexico loses a ton of money subsidizing uh pemex and the outgoing president still had that 1980s mentality where natural resources are king and so he invested i believe 15 billion dollars into a new refinery that people say is going to lose money from day one like he just couldn't let go of the past and i think she's much more likely to

Starting point is 00:07:48 take a pragmatic approach to to building like modern industries rather than being stuck with this uh more uh outdated view yeah and i think the another that all makes sense it seems again i maybe i just am biased to liking mexico uh mexican stocks as well but it seems to me like she could be honestly a huge improvement over AMLO from an investor perspective. And one thing that people discuss is, you know, the violence that has happened in some of the regions in the country. But I think the, you know, the homicide rate in Mexico City came down. And as you mentioned, the actual stats of the, I don't know what sort of crime rates there are, but they haven't gotten worse, like those, you know, newspaper headlines or clickbait headlines might say. What are your

Starting point is 00:08:38 thoughts on that idea that you can't invest in mexico because it's like a you know quote unquote corrupt country or you know the cartels run stuff i mean you see investors talk about that's that type of thing is that have any sort of validity or is that something you're you're not concerned about um i'll give you a funny anecdote first which is i talked with investor relations at one of the the airport companies and he said that uh that the top concern they'd heard from american investors was crime like since the company was listed and they've produced a 500 percent total return since then and crime is still the top thing everyone asks about so he's like it's ever present in the background we pay more on security and that sort of stuff than a airline airport company

Starting point is 00:09:21 in in europe would but it's it's just a background part of the business landscape it's not something that's informing our day-to-day decisions i think another important thing to realize is that you had very open warfare in mexico like 10 years ago between cartels like in major cities you had cities like ciudad waters that were the most dangerous in the world and now it's much more in rural communities and areas where there's not really much economic activity obviously any homicide is way too much but if it's not happening where business is happening that's that lowers the risk profile i think you see that in terms of all the big companies like tesla obviously but um all these huge companies that are announcing new

Starting point is 00:10:03 auto plants aviation plants uh even semiconductors now in mexico that have announced that since the pandemic under amla and so clearly they have looked at the security profile and said hey we're willing to put three billion five billion into a factory here yeah i was going to ask about that they it feels like i'd say kind of going off gut here but around 2022 i believe it seemed like there was a lot of positive sentiment about mexico especially um around near shoring uh there was the demographic tailwind which i i assume is still there because it's hard for those to change very quickly um and then there was a lot of talk also about just general foreign investment into the country how have those trends uh evolved at all has there been any big developments near showing

Starting point is 00:10:55 wise and a large you just mentioned uh one company with a i think you said three and a half billion dollar investment has it been something that's continued and has there been more spend from these uh foreign companies yeah so last year to give a very concrete marker of success mexico passed china as the largest exporter to the u.s so so nice to see kind of a very concrete sign that the reshoring narrative is actually reality not just a story um in terms of investments we have not quite hit a record in foreign direct investment yet but we're getting close to the peak from a decade ago when mexican stocks were trading far far higher than they are now so uh foreign direct investment trending very sharply in the correct direction you're also seeing a lot more

Starting point is 00:11:48 internal reinvestment from mexican companies who before had been sitting on cash or investing elsewhere in latin america now they're putting money back to work in their home markets and industries which is fun to see you saw record activity at the mexican stock exchange for credit like mexican businesses are eagerly tapping funds so i think you'll see a lot of construction a lot of logistics you're seeing a ton of ipos activity and reits warehouses logistics Yeah. And so I think the activity is clearly there, both from multinationals and just Mexican companies that are saying, hey, this is actually a good business environment. It's like for the past decade, you had 1% GDP growth annually in Mexico.

Starting point is 00:12:29 So companies were just kind of hunkered down for winter. But now you're seeing a real dynamism that you haven't seen since the early 2010s. Yeah. And just to put some numbers behind it here, I'm looking at the iShares MSCI Mexico ETF, and it's down 12.9% over the last year. Ian, you mentioned that that's one of the best ETFs to follow to track the sentiment on Mexican equities. Part of that, if we look recently, there's been a little bit of a significant drop

Starting point is 00:13:08 related to, we're recording this on Tuesday, August 6th, Monday and Sunday, there was a big kind of currency-driven market downturn that ended up affecting Mexico and Mexican equities broadly. Can you maybe describe what happened there? And I assume most of our listeners are not currency experts, so maybe go into kind of the details on how it actually ultimately ends up impacting equity. okay sure yes i'll start with the technicals hopefully you can get this out of the way pretty quickly but the basic idea is a carry trade where you want to own assets that have a high

Starting point is 00:13:50 interest rate and then bet against assets that have a low interest rate and then can collect the difference as pure profit people have been betting against the japanese yen because japan's interest rate has been zero percent for more than a decade and then anything that you say you bet against yen at zero and then anything you buy with the yield is going to do better than that so you could buy u.s bonds for example and get a five percent yield which five is better than zero so that's nice but if you want to juice it up a bit you can go to emerging markets that have even higher yields mexico has still has some of the highest yields out there the central bank rate is 11 percent and to me that seems way too high given that mexico has been performing well the

Starting point is 00:14:32 peso's been up business is growing inflation's like four percent and so in my view the central bank rate has been way too high this attracted a ton of capital people are saying oh i can buy mexican government bonds no risk 11 short japanese bonds zero percent uh maybe even use two or three times leverage on that now i'm making 22 33 a year on what seems like a very low risk trade just between the pandemic and now the mexican peso had more than doubled against the japanese yen and then you throw the interest on there and it turns into just a crazy trade i think the irr was like 38 a year like prior to the recent drawdown and so you just had a lot of hedge funds and hot money that were long mexican peso short yen uh maybe they didn't know that much or care that

Starting point is 00:15:17 much about the mexican story they just said hey this is a stable country low inflation they're paying me high yields i like this trade and obviously japan hiked interest rates recently things went kind of bonkers over there and the yen starts going the other direction and all these hedge funds that were riding the momentum trade said hey i need to get out or i need to reduce my position sizing and so suddenly overnight you basically have a 25 percent drop in the peso versus the yen which is a huge move and then mexican stocks uh because like if you own the mexican etf in the u.s it's quoted in dollars not pesos and so in the peso slumps that hits your quotation in dollars there's not no one in mexico saying i need to dump my stocks because

Starting point is 00:15:58 japan's central bank hiked interest rates but just due to the vagaries of how foreign finance works you get this huge move that's unrelated to the actual mexican economy and if anything like the peso is getting a little bit strong and so now that the peso is backed off that makes their manufacturing more competitive that makes their tourism more competitive and so in my opinion And this is a healthy correction in the Mexican peso that that will boost GDP growth. Obviously, investors that are just looking at the volatility might think Mexico is unstable. I think this has something to do with the president elect, whereas really it's totally unrelated to that. OK, that makes complete sense. I think that's a great overview on how this works and why, you know, it's not actually the underlying Mexican economy that's getting hit.

Starting point is 00:16:45 it was just something that happened in financial markets with big traders and hedge funds and all that good stuff. Now, I'm thinking as a listener, if I'm listening to this podcast and I hear you say, look, the Mexican economy and the thesis and the narrative has turned out to be moving on the track that people thought, the people that are optimistic about the Mexican economy, and yet stocks are not really moving that much yet, although there has been. We'll talk about some that have performed quite well. You mentioned the airports. So it seemed like, okay, there could be some opportunities here. But if I'm someone from the United States, Europe, Japan, wherever, someone that's not really having boots on the ground, what do you look at to make sure? Because

Starting point is 00:17:29 investing in a foreign country, you kind of want to make sure that things are going well. What do you use to track to make sure that the economy is doing well, the regulations are fine? I mean, obviously the elections are going to be in the news, but what are you looking at on a day-to-day basis to say, okay, you know, Mexico is still doing like I think it's doing? Yeah, I think for Mexico, I could answer that generally for any country or Mexico specifically. For Mexico specifically, because 80% of exports are now manufactured goods primarily to the U.S., I would just say that making sure that relations with the U.S. remain good. And that's driving the whole story here. So as long as Scheinbaum is being reasonable in terms of relations with the U.S., as long as your trade continues to grow, which U.S.-Mexico trade is going to have a record year in 2024, as long as you see new factories opening in Mexico run by U.S. companies rather than factories shutting down,

Starting point is 00:18:30 if factories started shutting down, they'd say, oh, we have problems here. um yeah i think that's kind of the key metrics the reshoring story is going to be the overarching theme uh i figured that the exact numbers but excluding mexico city like 75 of the mexican economy occurs in the border states next to the u.s it's a crazy it's just the i don't think people understand how much mexico is tied to the u.s um yeah i was sorry i was gonna say that that I've seen like various charts that the north versus the south, like the farther you move south in Mexico, people in the north are actually significantly wealthier than in the south or businesses or incomes in general. And I guess that does make a lot of sense. Maybe let's talk more

Starting point is 00:19:17 stocks now. We've discussed in the past the Mexican airports and Alsea, which is a, let's say, very, very interesting fast food franchisor. I think I'm using the right term there. What companies are you interested in right now? Is Alsea still something that you're interested in? I'm seeing the stock, at least in U.S. dollars, has come down a little bit, but obviously that's probably because of the peso stuff. Do you still think there's opportunities with a lot of these companies that can benefit from a growing Mexican consumer traveler whatsoever?

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Starting point is 00:20:32 yourself. Simply go to joinyellowbrick.com and search a company or ticker that you're interested in. You are bound to find a great report on just about any company. That is joinyellowbrick.com. Yeah. So I'd say my four favorite ideas because of the ones that I've talked about the most recently with my followers would be still the airports and I'll say yeah so still like both of those I'll say it's pulled back what 30% now off the highs and so it got kind of expensive there for a few months but I think it's back in a reasonable entry price here still like the airports two other ideas I like right now one's called rota plus which makes water tanks I think it's going to i think it's the one company that uh will benefit specifically from shinebomb since

Starting point is 00:21:22 she's already announced that there's going to be huge investments in water infrastructure mexico is one of the most water starved countries on earth mexico city sits in the middle of a desert essentially um the city's shrinking like they've been tapping out all of their reservoirs and so you're going to have to have huge investments in water recycling which is something that rotoplus does and you have a huge amount of trucked in water like from areas where there are rivers up to mexico city which is just horrible for the environment just imagine trucks going several hundred miles to carry water drinking water up to people this is ridiculous and so obviously to make mexico to make more mexico more prosperous and more environmentally sound

Starting point is 00:22:07 and just kind of more of a modern country in general i think you're going to see huge investments there this is something amala didn't care about because he he was like i said he was a very 80s pomp and circumstance president his idea of investment was like building a railroad that no one's going to use and like just kind of building these huge flashy multi-billion dollar projects where shine bomb is much more like a practical where can i make life 10 better for people and she already announced since being elected that she's going to invest heavily in water so i think rotoplasts is going to do well there's also a construction angle there every house needs a water tank they have overwhelming market share in mexico for water tanks and so if

Starting point is 00:22:45 you believe there's a housing shortage in mexico and that you need millions of new units that's going to be a huge tailwind to their sales going forward so that's one company i don't know if you want to follow up on that or should i go into the other one yeah i guess one follow-up on that is what's the ticker for anyone that would want to do farther research yeah it's primarily traded in mexico under the ticker agua which spanish for water so the catchy ticker um there's a otc listing grprf but it's not uh not much trading there so most trading happens on the mexican exchange okay i mean that thesis does make sense what do the demographic tailwinds relate to the kind of the water infrastructure thesis as well where you're going to have all this family

Starting point is 00:23:34 formation that's been talked about or is that um i guess just generally for all these companies i think yeah you have more housing units because um just there will be more household formation you have the largest part of the mexican population is in their 20s and 30s a lot of people still live with their parents and so presumably especially as the economy gets better you would expect people to want to buy their own houses or apartments um yeah all right and the stock hasn't i guess it's gone really nowhere at least i i guess i don't know it depends what chart i'm looking at it might be in u.s dollars here but it's hasn't gone anywhere since and i'm really looking at the basic stuff since 2021 and stock trade that i think a pe just

Starting point is 00:24:22 below 20 is that sound right and what is the i guess your thoughts on the growth prospects is this a low single digit grower high single digit grower even more um how are you valuing the stock yeah so i'll go even farther back uh the stock ipo'd i believe 2016 17 i don't remember offhand but anyway prior management was trying to grow at any cost empire building making acquisitions in south america you know just the usual bad decision making and so the stock went down uh and then finally that you bring in new management new management says we've been doing a lot of stupid stuff and so now our focus is going to be on margins specifically any new investments they make have to have an roic of double their cost of capital like any decision made at the company has

Starting point is 00:25:10 to fit with that metric they've had a five-year plan to boost even to double even on margins and they're well on their way to hitting that so the 2025 goal they're ahead of schedule i think the market's a little frustrated because their revenues have been flattish recently they've been turning down business particularly in markets like peru and argentina that are more volatile and harder to make sure they hit their margin profiles on so i think people look at the lack of top line growth and say hey this thing isn't moving there's all these like favorable things going on particularly mexico um and yet i think when you look at the underlying story it's like every quarter margins are up a couple hundred basis points and so you see a company that is

Starting point is 00:25:48 uh exercising pricing power and getting customers they want to deal with rather than taking any business uh just for revenue growth they were also hit by the peso being too strong which i know ironic uh but because they import like goods for making the tanks and pipes and stuff from other places and so as the peso went up like your costs uh in mexico for salaries and everything were going up but you weren't necessarily getting more sales and so now that the peso is backed off a little bit there should be a big fx benefit in the back half of the year i don't really care about that personally like i'm not playing it quarter to quarter but for the funds that do want to see like a positive trend in earnings like you're going to get a nice pop in earnings

Starting point is 00:26:29 now that the peso is stabilized i mean makes sense to me if it's you know not a super demanding valuation you have revenue not growing right now but there is that long-term tailwind and hey if we get slight margin expansion that's a great way to grow earnings per share how potentially a short-term tailwind if if the president starts buying a lot of equipment particularly the water treatment recycling that's like that's big big ticket stuff and then you get service revenues attached to running it as well so if if rotoplast can get in on those contracts going to be very good for them. Short-term catalyst, long-term tailwind. That's stuff we like as well. I guess one more follow-up on this company. What do you think of their

Starting point is 00:27:17 new capital allocation? Or maybe you've talked about the ROIC stuff, but what about their capital returns? Do they have a dividend policy, buyback policy? I know a lot of people get frustrated with foreign countries kind of hoarding cash from the balance, or it's not foreign countries, companies outside of the United States having inefficient balance sheets. So what are your thoughts on them? Yeah, so they've paid, I believe, traditionally around a 2% dividend yields. They do want to return some capital to shareholders. But their metric, their rationale is to invest internally in the business on anything where

Starting point is 00:27:50 they think they can achieve their stated targets and get them towards their EBITDA and growth goals. And so far, they've had enough internally that they felt that they can keep investing back in the business. But they would return capital if they run out of projects that were meeting their capital goals. okay i want to talk about the airports because this is well this is once again kind of gut feel but it seems like some of the mexican companies that most uh international investors follow um or at least american investors follow because it's a business model that's fairly easy to understand So I'm curious. Last we spoke was prior to this. There was news about potential government intervention. I believe it was some sort of a tax on revenue or sales. I think there were a lot of misconceptions with that. Could you maybe go over that news and then also could you explain what these businesses are for

Starting point is 00:29:00 anyone who's not familiar with the Mexican airports, how they came to be and how they actually make money? Sure. Let me just throw one aside in there and then I'll answer those questions. It's funny that the Mexican airports are some of the most valued companies in the country because their market caps are sub $10 billion. We're talking about one of the 10 largest economies in the world and these companies are tiny like in the grand scheme of things the largest company in mexico by market cap is walmart mexico the subsidiary obviously of the u.s retailer with a 70 billion dollar market cap it is not even listed in the u.s like most investors don't even know it exists and and so your largest company in mexico is only listed in mexico and

Starting point is 00:29:39 trading like 18 times earnings it's like that's where we are in the stage of the mexican bull market and the narrative like oh is it mexico like already popular like no not at all but anyway two of your questions uh yeah so the airport business model the mexico privatized most of the airports in the late 1990s you have three holding companies that are publicly traded in new york that operate different concessions within mexico all of them have been good investments um they're attractive because you get uh guaranteed rate increases every year tied to inflation and then your concession your non-aeronautical revenues are not regulated or not regulated directly and so all of your uh resale car parking advertising all that sort of

Starting point is 00:30:30 hotels um that has grown much faster than the regulated stuff like for pacifico i believe it's been two and a half times as fast there's a lot of benefits to scale like as your airport gets bigger you get better advertisers you get better luxury stores and everything so it's just a very nice business model all three of these airport operators have thrown out 70% EBITDA margins for the past 20 years and when you get top line double digit growth combined with that sort of margin good things tend to happen what went wrong last year it started with the pandemic the government gave them extra relief kind of as a concession for them not making money in 2020. And so as a result, their EBITDA margins went from 70 up to like 75, 77, which was very nice. We appreciate

Starting point is 00:31:19 the pandemic relief, but really we didn't need it. None of the airport groups had debt going into the, they were all at less than one time's debt to EBITDA going into the pandemic. And so, and traffic by the end of 2021 was back to 2019 levels anyway. So the airport started printing record money and they're still getting this concession the sorry pandemic relief and so therefore the the government is looking at it and saying hey why are you guys earning so much money like the concessions are supposed to give you like 70 margins you're earning like 77 and you're generating record profits and paying out record dividends and so one day we just got the announcement that the government was uh renegotiating the contracts and so obviously

Starting point is 00:32:01 people saw that and said oh no mexico has a left-wing government socialism they're going to nationalize everything uh the stocks were down 40 the meltdown on twitter was very um emotional i would say there were so many people saying ccc this is why you don't invest in mexico right it was it was very uh very harsh but sorry continue oh that's right i was at the center of that storm and it was a rough couple of days um but yeah so the stocks are down 40 to 50 percent overnight um because we just didn't know what was going on we just got this terse like press release that the contracts are being renegotiated fortunately cooler heads prevailed uh once they started negotiating we saw the government just wanted to walk back the pandemic related like

Starting point is 00:32:49 extra benefits that they got and now EBITDA margins are going back to 70% which I mean we're not going to grow profits this year whereas we would have otherwise but it's fine I think to these are 50-year contracts you don't want to make stakeholders upset and so i think it's perfectly reasonable that we go back to where the contracts were prior to the covid um you already had a key piece of how the airports work in mexico you renegotiate every five years in terms of how quickly you can raise rates like tied to inflation um but then you have you as the airport operator have to build like new terminals or runways or whatever to get your rate increase and so we already had one of those renegotiations that went through last fall and they got a renegotiation

Starting point is 00:33:37 that was status quo like precisely what you would have expected and so that threw another bucket of cold water on this idea that the government had it out for the airports like it's like business as usual just we don't let you guys earn excess profits anymore and here you can have your normal rate increase how has tourism changed following covet i know uh last we spoke i think it was mostly about pacifical airports there was a big kind of boom following covet um from tourism from the states into some of the uh just the higher traffic into some of the more touristy destinations Are we seeing more in-country travel, or is it still kind of tourism from the States is being sort of a growth vector for them? That is a great question, and to be honest, I can't answer it.

Starting point is 00:34:32 And there's a good reason for why I can't answer it, which is the aircraft shortage that we're having now. I don't know how closely you follow this, but all of the Boeing 737 issues have grounded a lot of U.S. planes that would normally fly into Mexico. and then two of the three mexican carriers are heavily reliant on the pratt and whitney engines that have also been recalled so i believe valeris is eric valeris is the largest discount carrier in mexico i believe they're down 20 of their planes and similarly for aero mexico um and then like in the us you see like spirit appears to be on the verge of bankruptcy so all this to say that there's huge capacity problems there's just not enough planes and so like load factors like the amount of people on planes at the Mexican airports has never been higher, but just the

Starting point is 00:35:17 amount of planes hitting our airports is down like 5% year over year just because no one has enough metal. And so as a result, the airlines are moving capacity from domestic routes to international routes because they get paid more. You can charge a lot more for international flights. And so you're seeing growth in international and shrinkage in domestic, but I don't think that's organic. I think it's just airlines are making the best of a bad hand my guess is when the market normalizes which is probably the end of 2025 if you'll see domestic grow a lot faster than international but that's just a hunch like right now the airlines are playing a really difficult hand yeah it seems like you know i was trying to think while you

Starting point is 00:36:00 were talking there what would cause to i guess the two factors you know the domestic tourism or domestic travel, which is really just going to be, well, if the country's economy grows, there's going to be more money spent on this. And then I'm really struggling to think of why tourism from the United States and maybe, you know, a smaller amount from other countries would slow down. It's hard to imagine. I just don't think that, again, as long as the government stuff is there, no stock is foolproof, but it feels like, you know, businesses that are going to be pretty inevitable if this tourism keeps going is that how you think about it yeah i mean i i agree with you that's what i do think about the downside risks just to be careful because

Starting point is 00:36:47 there's huge positions for me and so i'd say what could go wrong like if you had an actual crime wave we haven't really had one but if you had one particularly if the state department issued a blanket like uh be very cautious traveling to mexico sort of advisory as they have for columbia for example if they did that for mexico i think that would hit demand pretty badly um you actually had the mexico's aviation sector got downgraded from category one to category two which limited the amount of new routes that they could open to us um but that's been resolved now but if you had other issues with mexican aviation regulation um that could be an issue um remote work there's a lot of americans and canadians living in mexico permanently or somebody permanently and they're

Starting point is 00:37:31 flying a ton like they're i don't know someone living in mexico city might fly back and forth six times a year so they're driving way more travel than like an actual tourist so like i don't think this will happen but if everyone says go back to the offices like we're going to fire anyone that's trying to work for mexico i think you could lose a couple hundred thousand like very frequent very frequent travelers from mexico who are just living there finally the other risk i'd mentioned this is alleviated over the past week or two but if the mexican peso gets too strong and people say this isn't so attractive to live here and so a lot of your remote workers and also retirees might say hey why don't we check out Costa Rica or Peru or whatever instead of

Starting point is 00:38:10 Mexico and they it's I don't know if it's all three of them but I believe Pacifico had some international airports as well correct that's correct two in Jamaica okay and is i think we spoke about this last time but i can't remember are they actively acquiring or building extensions to their existing ones they are building extensions in guadalajara and in tijuana and they're bidding they're always looking for any airports to come on the market in the americas they're conservative they're low bidders. There've been several concessions that went to other publicly traded companies that they didn't even bid on because they said, we can't make an offer that would hit our internal

Starting point is 00:38:59 capital requirements. We'd rather just pay you dividends. That's what they're bidding for the Turks and Caicos concession that's open now. So that would be their position in the Caribbean, if it goes through. I don't know. We'll see. And is that typically a government seller? They just want the cash today and they're willing to sell it to some sort of private buyer? Yeah, either a government seller or sometimes these contracts are resold. In the case of Soresti and other of the Mexican operators, they bought their Colombian airports because they were previously owned by Koreans who didn't really understand the market. And the Koreans just saw that they were struggling. They didn't understand the retailing at the airports, for example, just culture clash.

Starting point is 00:39:42 And so they auctioned it back off. And so the contract still stays under the terms of the original concession, but a new owner can get it. FinChat.io is the complete stock research platform for fundamental investors. They have all the standard financial data on more than 100,000 stocks globally. But beyond that, they have company-specific segment and KPI data on 1,800 stocks. Want to see NVIDIA's data set in revenue? FinChat's got it. Like to track Spotify's premium subscribers?

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Starting point is 00:40:41 Earlier in the show, you heard us talk about the investing platform public.com. That's where you can trade options with no commissions or per contract fees, and you get a rebate of up to 18 cents per contract traded. NerdWallet recently gave Public five out of five stars for options trading. If you want to see why, go to public.com and start getting a rebate of up to 18 cents per contract traded, paid for by Public Investing's options not suitable for all investors and carry significant risk. Full disclosures in podcast description, U.S. members only. all right let's talk about perhaps my favorite mexican stock i say this as someone who's never

Starting point is 00:41:21 owned it but uh maybe the time is now with the stock down 30 i'll say uh we did a full podcast on them for anyone wants a full overview of the business and the history and stuff go listen to that one from a while back i'm sure you know the basics hasn't changed but if you give a brief synopsis on that and why the stock is down 30 percent has the story changed just an update and i'll say sure yeah happy to follow up on that one i think i think we recorded on originally a good timing yeah i think the stock worked i think it doubled from where we first talked about it like you said big pullback um and so yeah something changed and there's this a great buying opportunity. For people that aren't familiar, they're the largest fast food operator

Starting point is 00:42:07 in South America, at least under one corporate roof, about 4,500 locations. A third of that is Starbucks, a third of that is Domino's, and then a third of that is everything else. Half their stores are in Mexico, and then the remainder are split between Europe, primarily Spain and South America. The company originally got started with Domino's many years ago and burger king which they also have a smaller position in and then 2001 they got the starbucks concession for most of latin america that was the game changer i think their stock was at two mexican pesos at the time they inked the starbucks deal and now it's like 55 so i'm not sure what the cagger on that is but pretty good um and the company has been exceptionally aggressive over

Starting point is 00:42:56 the years they're always running it at like four or five times that d but uh this was their greatest strength but also the the great weakness because it was like they're spending every last dollar they can to open more starbucks and more dominoes and when it works it works you're getting like 15 18 percent returns uh unlevered on new stores that you're opening and then like throw a huge leverage on that you have an absolute cash growth machine uh late 2010s over latin american economy slowed down like i said mexico had one percent gdp growth for many years consumers were going back to cheaper options fast foods expensive a luxury in mexico and south america and so it is actually vulnerable to economic tides then the pandemic hits like i said the company is like

Starting point is 00:43:41 four or five times levered now most of their stores aren't open like the stock collapses people think they're going away but thankfully they run dominoes and they already they were the only like pizza company that had an app already in place for delivery so like their app deliveries went up like I believe 50% in 2020 over the prior year and so that got them through the storm, they've come back strong balance sheet is in good shape, they've

Starting point is 00:44:04 rolled their debt, they're back to expansion mode, they're opening 300 new units a year so management's back to their usual strategy which just to look at the stock chart prior to the pandemic worked exceptionally well for them, I think they'll continue

Starting point is 00:44:20 to have success, I think Starbucks in particular they can open like 200 stores a year between south america and europe for the next decade and obviously the market was loving this up until about april i think the stock peaked i think what's gone wrong there just the mexico sentiment around mexico has cooled off a little bit for the reasons we've already discussed but then obviously starbucks like us the corporate parent has their stocks going way down people are very frustrated with starbucks's management you of activists there people are saying the model might be broken uh oh is that a risk to the

Starting point is 00:44:57 franchisee obviously if things go so bad that like starbucks's brand is damaged worldwide i guess it could hurt them but i don't think your mexican or colombian consumer that's buying starbucks is looking at like their labor strife in the u.s or there's too many homeless people in the bathrooms at the stores and in new york or whatever the people are upset about in the u.s So I'd say the Starbucks brand, at least globally, remains strong, and people should look past the concerns around the corporate parent. Yeah, I should say anecdotally, too, in South America, Starbucks is looked at as, I know it's somewhat of a premium brand in the United States, but it's definitely more of a premium brand. And and when I think maybe you mentioned this or someone else mentioned this to me, when they open up in, say, Colombia or Argentina or somewhere like that, there are lines out the door. And when they're a new location in a place that hasn't been before, people want to check it out.

Starting point is 00:45:57 So I think that's maybe some evidence that the brand is still very, very strong in Latin America and it might not have the same risk, but different risk because it's more of a premium product. in in in those markets but i guess one follow-up on that what's the runway for reinvestment for this company i know the stocks probably looks cheap right now just because of the drawdown but you know runway for reinvestment matters like how penetrated are are these markets yeah it's a great question uh i think mexico is getting fairly fairly penetrated but south america in particular hardly anything uh as recent going into the pandemic i think there are only 20 starbucks in all of columbia for example uh i think it's up to about 100 now but the largest columbian chain is still many multiples of that uh it's a country of 50 million people i think it

Starting point is 00:47:00 can support more than 100 Starbucks same for like Domino's where I live in a city of 300,000 people and the first Domino's just opened here like two years ago so to give an example uh that's uh yeah I think there's still opportunities like you still see them announcing like we just opened the first Starbucks in the whole country of Uruguay for example like there's still whole countries that there's no Starbucks um and I'd also mention their Starbucks corporate is very happy with them when their operator in in france ran into trouble starbucks gave alcea the opportunity to which they did to take over the the france locations um i think you'll see opportunities for them to get more stores um kind of as a cleanup for any uh now that starbucks is looking to reshape their

Starting point is 00:47:47 operations and i'll say it's been arguably their best uh franchisee partner i think there's a lot of opportunity both within their existing regions and anywhere else where where there's more growth opportunities would you say starbucks or have they broken it out on by franchise type is it starbucks the largest kind of growth driver for them or is it a blend of all of them uh yeah it's starbucks and dominoes depending on the year during the pandemic the dominoes was the biggest growth driver now it's gone back to starbucks um oddly enough burger king is going to be a major player for some reason argentines love burger king um but the company was not wanting to open new stores uh during the socialist hyperinflation era but now that malay is in power uh it sounds

Starting point is 00:48:36 like i'll say it's going to open a ton of burger kings in argentina so that should be interesting yeah yeah in general it makes a starbucks indominus gotcha gotcha yeah and the general growth or potential uh in south america for some of these fast food quick service restaurant chains we've talked a lot of stocks talked a lot about the economy hopefully people get a better understanding of the general mexican economy how this election may be a little bit different than some of the headlines make it seem how the cartel isn't running the entire country uh and there's definitely some fun stocks for people to research further i mean i think i'm gonna be researching this water tank one ticker agua and then there's

Starting point is 00:49:19 airports, all this stuff. But I think in general, what, and Ryan can have any follow-up questions for the end here too. What are you looking for in, you know, there's hundreds of stocks out there across all these different Latin American countries. What are some of the criteria you look for in a stock that says, hey, this is going to make my watch list or something I'd buy? yeah for mexico specifically i think the real opportunity here like you mentioned mexico's great demographics and you have people you have people that were working on avocado farms making pennies a day that are now moving to tesla factories and earning five dollars an hour these people are going to spend money in a way that they've never had access to before

Starting point is 00:50:03 so i think anything that enables that middle class emergence on a ppp adjusted basis like spending purchase power basis the state that monterey is in is now wealthier than alabama and louisiana like that's the level that mexico is hitting like in the north and so i think as you see just tons of more factories open you see relations with the u.s continue to grow as everything moves out of china i think you're going to see tens of millions of mexicans emerge to relative parity with american consumers or at least like the low end of american consumers And so I'm looking for companies that can ride that wave. Anything consumer related, be it retail, be it fast food, like we mentioned, travel with the airports, stuff that goes into construction, like water.

Starting point is 00:50:48 If people are going to be buying much nicer houses, it's going to be a huge driver there. And so, I mean, a lot of people think emerging markets are just banks and mining and utilities, but I think you can do a lot better than that. Mexico has several hundred listed companies. And so there's plenty of opportunities to go looking for stuff that can be more specialized in terms of riding the mega trend. And for the listeners, why Ian's talking about the, say, growth from someone who is earning, what would the number be in US dollars? Maybe less than a good barrier is $10,000 a year or even well less than that. and then growing to 15,000 a year, 20,000 a year, $25,000 a year is you actually have room to one, save, and two, have discretionary spending, which is before people were, a lot

Starting point is 00:51:38 of the people were only on stuff that was durable goods like food. They have a bank account, obviously, but now they can do discretionary purchases like a more expensive quick service restaurant or taking a quick trip to another side of the country, which would involve going to the airport. So that's a huge change in just consumer habits as you hit that threshold of someone who can actually decide what they want to do with their money. And it seems like especially I didn't even know that fact about the Monterey state being, you know, passing some of the U.S. states. That's that's quite interesting. It seems like a lot of the people in Mexico are making that transition. Yeah, I think people just fail to appreciate how much Mexico has really developed.

Starting point is 00:52:19 and i would encourage investors particularly north american investors to go just take a quick visit you have very short flights from the u.s and canada and i think people see the reality has really changed from where maybe it was 10 or 20 years ago or what you've seen in movies i think you'll see that there's much more stable country than than what's portrayed in the media and i think particularly the you have tens of millions of mexican americans living in the u.s And then you have all these Mexicans that are working for U.S. companies. You have these huge cultural ties that are forming, like now the most popular sporting event aside from the World Cup in Mexico is the Super Bowl. People like they have tens of millions of Mexicans that love the Dallas Cowboys. like the cultural ties are so significant and it's only going to grow as demographics keep playing out and so i think if you're an american in particular you should have a view on mexico

Starting point is 00:53:10 because it's it's going to be as close to the u.s as canada is within a few years in terms of importance yeah sicario might be a good movie but that's not really the reality on the ground anymore is that i think that's a good way to sum up sorry ryan did you have a follow-up there No, I was just going to say, Ian, it's always a pleasure when you come on the show and it always gives me new stocks to look at. For listeners that enjoyed this, what's the best place that they can follow more of your work? yep so ian's insider corner is uh where i do my my big write-ups on all the ideas we've talked about today and everything else that i look at that's either on substack or on seeking alpha and then i'm active on twitter i are bezic b-e-z-e-k and you can reach me there for more just quick observation what's going on with the markets all right and both those links will be in the show

Starting point is 00:54:05 I will say we just hit the surface level on a lot of these stocks. I know there's a lot of information for anyone new to the Mexican stock market and economy that they learned about, but Ian goes way more in depth. So definitely check out those links. If you're interested in anything further, I'll say thank you, Ian, again, for coming on. Let me hit the disclosure. We are not financial advisors.

Starting point is 00:54:26 Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast. I have held them in the past and may buy, sell, or hold them in the future. Thank you everyone for listening. Thank you Ian for joining us and we'll see you next time.

Chit Chat Stocks - Should You Buy Mexican Stocks? (ALSEA, AGUA, PAC, OMAB)

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