XP is Tuesday's IBD Stock Of The Day as Brazil's leading provider of low-fee financial services looks to capitalize on falling interest rates and a suddenly surging local stock market. XP stock, which rose near an early entry in afternoon stock market action, is among a number of Brazil-focused financial stocks showing strength.
The flagship IBD 50 list of leading growth stocks includes XP stock. MercadoLibre, the e-commerce and fintech giant whose top market is Brazil, also is on the list. StoneCo, a Warren Buffett-backed digital-payments facilitator, briefly cleared a buy point on Tuesday.
Brazil Stocks Come To Life
XP had 4.4 million active clients at the end of Q3 with about $220 billion in assets. CEO Thiago Maffra told Reuters in October that his firm has 7% to 8% of the Brazil's investment market, with 80% held by the country's top five banks. But XP aims to overtake them all within five to seven years.
Double-digit interest rates have been conducive to bond investments. "If you look at the performance of riskier assets in the past 12 or 24 months, almost every asset class is losing" to the key interest rate of Brazil's central bank, Maffra said in the Nov. 13 earnings call.
It's hard to see retail client inflows picking up "if we don't see the price action from other assets going up," he said.
But Brazil's Bovespa stock index got a spark the very next day from the soft consumer price index in the U.S., which basically closed the door on any further Federal Reserve rate hikes. As the Fed gets closer to shifting to rate cuts, the softening of the U.S. dollar has eased inflation pressures in Brazil for dollar-priced commodities. Since August, Brazil's central bank already has cut rates by 150 basis points to 12.25%, with more cuts on the way.
Over the past month, Brazil's Bovespa stock index is up 12.6%, even more than the S&P 500 and the Nasdaq. Investors may be expecting that the pace of new clients could pick up for XP stock.
XP Focused On Execution
While waiting for a better investment climate, XP has made strides improving its bottom line and broadening its growth opportunities.
The focus on controlling costs yielded a 37.3% efficiency ratio in Q3. Noninterest costs as a share of revenue fell more than 400 basis points from a year ago and 100 basis points from the prior quarter.
Meanwhile, revenue from new services offered by XP, such as credit cards and insurance, has tripled since 2021 and now accounts for 11% of revenue. "New verticals (products/markets) continue to help offset macro headwinds, diversifying our business and increasing the resilience of our model," CFO Bruno Constantino told analysts.
On Monday, Citi lowered its price target to 28 from 30, while keeping a buy rating. The firm highlighted XP's Nov. 13 announcement of a cash dividend of 73 cents per common share as a "strong signal" of its cash-generation capacity, even as it waits for trading activity to ignite.
XP Stock
XP stock rose 2.2% to 23.63 on Tuesday afternoon. A move past 23.92, which XP topped on an intraday basis, would break a trendline from XP's Aug. 23 high and offer an early entry point. The latest pattern since XP retook its 50-day moving average is a handle-like formation, though a flawed one.
XP stock's official buy point from a 14-week consolidation is 27.72, according to MarketSmith.
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