Investors were cautious this morning ahead of the so-called “quadruple witching,” which will happen at the close today. The simultaneous expiration of stock index futures, index options, and single stock futures typically means an increase in volume around the event.
The major indices were lower to start the day but were headed into the week’s final trading session with modest weekly gains. The S&P is up 0.34%, The Dow has gained 0.41%, and the Nasdaq is up 0.44%. We’ll have to wait until the end of today’s session to find out where we will finish the week.
In today’s stock pick, we’ll discuss a leading fintech company from Latin America that seems coiled and ready to spring into action after suffering from recent events related to the pandemic.
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Leading Brazilian fintech company StoneCo Ltd. (STNE) provides back-office software, loans, and other financial services to small and medium-sized businesses with a focus on reinvesting the cash it generates to acquire or build new financial products for its customer base. Since early 2019, the company has grown the number of small and medium business clients by 3x, revenue by 2.3x, and net income by 2.2×.
StoneCo felt the pinch earlier this year when Brazil went through a second wave of Covid that resulted in imposed commerce restrictions in several cities throughout the country. These restrictions were felt by STNE clients, with average total payments volume reaching a low in March.
The pandemic’s impact on small and medium businesses in Brazil has been severe, especially for the many retailers who are only now adopting an e-commerce strategy. In the first half of 2021, StoneCo increased loss provisions on its lending product, and overall growth has slowed.
StoneCo stock has decreased a whopping 46% since the start of the year. In terms of COVID recovery opportunities, it might be one of the most “coiled” because the impact on Brazilian small businesses has been so traumatic, but once vaccinations are scaled, the economic recovery will be fast – although delayed.
The stock’s decline this year was not surprising, but investors are now ignoring the progress that has enhanced StoneCo’s position for coming out much stronger when the recovery begins.
In addition, StoneCo is part of a much larger and fast-moving transition happening in Brazil around the digitization of financial services. The speed of this transition is unique to Brazil because the Central Bank is actively trying to reduce the country’s previous dependency on a small handful of large banks.
Significant progress in the first half of 2021 included closing on the long-awaited acquisition of Linx, a mature provider of enterprise software with a large footprint across Brazil. The acquisition will provide Stone meaningful cross-selling opportunities and a more diversified customer base. The 17 analysts polled mostly agree that STNE is currently a Buy. 10 give the stock a Buy rating, and 7 say to HoldStoneCo stock. There are no Sell ratings. The median 12-month price target of $77.47 represents a 73.59% increase from the current price.
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