IKN

a plague o both your houses

Bot Cosan (CZZ): Here’s why

It’s not just your humble correspondent that’s been following this stock very closely these last couple of days. Yesterday I got this (extracted) from TL, a regular (and very patient) reader:

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“……. you posted on CZZ recently but curious whether you like it here, despite your previous wariness of the “falling knife.” Isn’t it now below your cost from the last time around? Unless there is something company-specific that we’re missing it has the feel of hedge fund liquidation or similar forced or semi-forced selling. Do you see significant survival risk for this company? Maybe someone who realizes the world economy is continuously deteriorating thinks CZZ is going to get XXXXXX in the process? …..if you were to post again on CZZ I would be a happy blog reader.

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Well here’s the word for TL and others: I’ve jumped off the fence and bought the thing today at U$2.50. Here’s why. First let’s look at the sugar futures chart.

Click to enlarge

The last time I posted on this I mentioned that I’d like to see $13.50 broken. Well true to form that happened, but then the sugar complex dumped. However the chart shows that there’s no real panic going on and it only corrected inside the ascending channel. This, along with the general market negativity, whacked CZZ hard. The same three month period chart here shows the story.

Click to enlarge

Remember that CZZ is a high beta stock (2x) even in the best of times and these are surely not the best of times. So expect volatility at any given moment.

Fundamentals give reason to like CZZ right now. The ongoing sugar shortage in India has not gone away. CZZ has reacted to this by moving its ethanol-to-sugar production ratio down to its minimum of 40% ethanol to 60% sugar. And while we’re at it, please remove that immediate kneejerk raction you might have to the word “ethanol”, as CZZ supplies the profitable Brazilian market and is not in the same position as those flash-in-the-pans up North.

Financially, the dollar strength is clearly affecting both the commodity and the stock, but if you (like me) believe that there is a limit to this current short-term dollar strength and we’re close to the top right now (USD index 89 and bits) there’s another reason to like the short-term future. The other great issue at Cosan is its debt burden. Yes it’s heavy and they went to the debt market at the wrong time, but it’s not too onerous and looks serviceable enough under all logical outcomes to present circumstances.

The bottom line is that I believe CZZ is oversold now. So I bought it, looking in the short term at least for a return to that U$3.70 or so level it was revolving around. DYODD, dude.

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