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Water Stock Investors: Why Sabesp Stock Gained Nearly 15% in January

By Beth McKenna - Feb 7, 2017 at 11:09AM

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Shares of the Brazilian water utility have bounced back from the "Trump Effect."

What happened

Shares of Brazilian water utility Companhia de Saneamento Basico do Estado de Sao Paulo ( SBS 3.53% ) -- Sabesp, for short -- rose 14.8% in January. The stock has soared 92.4% in the one-year period through Feb. 2.

SBS Chart

Data by YCharts.

So what

Sabesp stock's January gain wasn't related to the company's business performance. The stock rose because the Brazilian currency, the real, bounced back in value relative to the U.S. dollar to approximately the same level it was at before it plunged after Donald Trump won the U.S. presidential election.

A collecting pool of filtered water.

Source: Getty Images.

Sabesp's stock got hit hard after Trump's win -- losing 24.6% of its value from Nov. 8 through Dec. 20 -- thanks to the slide in the relative value of the real. This slide was due to fears of what the U.S. trade policy with foreign countries might look like under a Trump administration. Trump's "America First" agenda could include trying to enact more stringent trade barriers with foreign countries.

As of Feb. 2, Sabesp stock is just 2.7% off the price it was at before Trump's victory. As is often the case with the stock and currency markets, initial reactions to events are often overreactions, and then things at least partially bounce back once market participants have time to digest the news. 

Now what

Investors bullish on Sabesp as a long-term investment should maintain their course, at least for now. 

That said, it's wise to keep an eye on what Trump does on the trade policy front. A significant decline in the value of the Brazilian real relative to the U.S. dollar would negatively impact Sabesp's earnings. That's because it would increase the company's interest expenses since close to half of its total debt outstanding at the end of the most recent quarter was denominated in either U.S. dollars or Japanese yen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP Stock Quote
Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP
$7.04 (3.53%) $0.24

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