Gafisa pops headlines but red flags are still waving


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Brazilian home builder Gafisa is earning a bit of applause in the market today for reporting stunning earnings growth -- but any gains will probably be limited at best. GFA ( quote ) tripled its profits last quarter and beat analyst forecasts by an impressive 23%. And it is true that Brazilian housing has been booming. But the sector's future does not look all that bright. Interest rates are climbing, which puts a big speed bump in the mortgage market. Plus, for the emerging Brazilian middle class, inflation is forcing many to make harder consumption choices -- and that is hurting savings for down payments, much less rent. We still think GFA is a sell. The company's receivables climbed last quarter, which indicates that it is billing a lot more accounts that are not paying promptly. Margins are falling. It is burning through capital and potentially extending credit to places that simply do not warrant it. And the CEO is resigning but staying in the company in a reduced capacity -- never a good sign. The chart may tell you the worst is over now that we are down 45% from the October highs, but you could argue that this is a stock that has a long way left to fall. We are in that latter camp around here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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