Consorcio Ara and The Coming Mexican Housing Boom
Why Ara Might Be the Most Undervalued Stock in North America
In 2012, I went all in on housing. I personally tried to buy as many foreclosed houses as possible. My thought process was that the country needed to build more homes or a massive housing shortage would emerge. The end result was The American Home and a portfolio of 2,500 single-family rentals.
As a country, we are now dealing with the aftermath of under-building new homes and apartments from 2009-2013. Everyone can see we need to build more homes to catch up.
But if I could do it all again, I wouldn’t buy homes. I would have bought homebuilders and anything home related. It would have been much, much easier. Check out Lennar (NYSE: LEN). It’s up ten times from its low.
I’m here to tell you the same thing is now unfolding south of the border in Mexico, which last year only built 158,000 new homes and apartments. This amount of homebuilding is absurdly low for a country with almost 130 million people that has twice the population growth rate as America. On top of that, 50% of the Mexican population is 29 or younger! S&P Global estimates that Mexico has already accumulated a shortfall of almost 10 million homes.
After uncovering this information, I immediately jumped to look at Mexican homebuilders. Imagine my shock to find that one of the leading Mexican homebuilders, Consorcio Ara (Mexico: ARA), trades at a ludicrous 38% of book value and 28% of true market value without having any leverage. And that despite a horrific Mexican economy marred by COVID, Ara generated a ton of free cash flow and trades at a remarkable 15% free cash flow yield on trough earnings.
How is this possible?
While Ara has a sterling 45-year business reputation, local Mexican investors have been frustrated by the company’s ultra-conservative stance around debt, balance sheet and buybacks. But that may soon begin to change as the company just re-instituted a dividend and with its massive land bank has many ways to return capital to shareholders.
Adding fuel to the fire is that the Mexican economy is also poised for a massive snap back. It is fascinating to think that any American stock that is even remotely connected to a return to normal post-COVID is at near or all-time highs, but many Mexican stock valuations remain depressed. Exports to America are 30% of Mexico’s GDP, so Mexico should be a prime beneficiary to a potentially red-hot American economy this summer.
Considering its net cash position, its cash flow even in the worst economic conditions and its absurdly low valuation, Ara might just be the most undervalued publicly traded stock in North America. And this valuation exists right before the Mexican housing market and economy ramps back up.
Here is my deep dive report: