Alex Letko, portfolio manager and partner at Letko, Brosseau & Associates
Alex Letko, CFA, is a portfolio manager and partner at Letko, Brosseau & Associates Inc.
Prior to joining the firm in 2018, he worked in equity research at Barclays in New York, where he covered the oil and gas industry from 2015 to 2018.
Previously, he was an associate with the economic research team at Evercore ISI in New York (2013–2015).
He is a graduate of Columbia Business School University where he received an MBA, University College Dublin, where he received a master’s degree in economics, and McGill University, where he also received an economics degree.
Alex Letko largely endorses Sabesp (NYSE:SBS), a Brazilian based company.
“One of those companies is Sabesp (NYSE:SBS).
They’re about the third largest sanitation company in the world by revenue and account for about 30% of investments in basic sanitation in Brazil. So we’re talking about water treatment, sewage treatment, and similar services.
They operate as part of a regulated asset base framework where your revenues and your profits are visible over the next several years until the next rate base increase.
As such, there’s visibility in terms of earnings growth, providing long term upside, as well as sustainability of earnings through the cycle, providing downside protection.
Brazil has tremendously lagged behind the rest of the world in providing basic water treatment services, and so the government has made this area a major priority.
A company like Sabesp (NYSE:SBS) will benefit from that policy thrust and thus plays a very important role in bringing what are essential services that we may take for granted in the developed world to the people of Brazil.
We think the company can grow their earnings around 18% per year between 2023 to 2027, while currently offering a 2.5% yield and trading at just 10x p/e.
So this is a great example of an opportunity in emerging markets where you can purchase growth, quality, sustainability of earnings, and a good dividend for an incredibly reasonable valuation.
Really, if you take a step back, we like to think of emerging markets as an area where there are huge unmet needs. Needs such as basic sanitation services, clean energy needs, access to affordable health care, etc.
And there are companies that are working to address those unmet needs. It therefore stands to reason that given the scale of these needs, the market opportunities for these companies are enormous.
From an investing perspective, chances are that if you cast a very wide net and construct your portfolio from the bottom up with high-quality companies that have good growth prospects, you will naturally pick up companies that are addressing these needs — because that’s where the opportunities lie.
And so those are the companies investors can expect to find in our EM portfolio — companies like Sabesp (NYSE:SBS).”
Sabesp (NYSE:SBS) is not the only top pick identified by Alex Letko in this interview. A China based drug distributor also earns his accolades.
“Sinopharm (OTCMKTS:SHTDY) is the number one drug distributor in China, with about 20% of the market. They’re also the number one drug retailer.
This company speaks to a large unmet need — access to high quality consumer health care products and services.
And so, in a country that probably still has ground to make up in terms of access to certain health care services, there’s clearly tremendous growth potential there.
That is reflected in Sinofarm’s numbers. We think revenue and EPS can continue to grow at over 10% per year. But this is not reflected in valuation, as they pay a very strong 5% dividend and trade at around 6x p/e.
The two examples of companies that I just gave you [Sabesp (NYSE:SBS) and Sinopharm (OTCMKTS:SHTDY)] are very representative of those that we have in the portfolio.
We’re looking for high-quality businesses with moats in their industries and good growth prospects. At the same time, we’re value investors, so we only pay reasonable valuations for those attributes.
Because we’re getting companies with exposure to growth, our portfolio has tremendous leverage to the upside over the long term.
But thanks to the emphasis on high quality, sustainability of earnings through the cycle, and reasonable valuations, our portfolio also offers terrific downside protection amid periods of market volatility.
This has allowed us to significantly outperform the index over a long period of time.
… it’s very important not to paint these markets in broad brushstrokes. It’s very important to understand at an industry and company level what is going on.
We have a team of 22 analysts which is divided across industry lines.
So someone covering the retail sector in Canada will also cover the retail sectors in Brazil and China, etc. that makes our analysts experts in their domains and gives them a global perspective when assessing the impact of something like onshoring.
This allows them to see that that’s something that will impact some geographies more than others, and that certain emerging markets may even be able to benefit.
In the end, you must be knowledgeable about the individual industry on a global level and you have to do the work. That is what we try to do.”
Get more of these top picks from Alex Letko and his team and learn more about the stock picking process by reading the entire interview, exclusively in the Wall Street Transcript.
