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Why Companhia Brasileira de Distribuicao Stock Just Popped 15%

By Rich Smith – Updated Sep 10, 2020 at 12:44PM

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Mixed messages out of Brazil spark enthusiasm for supermarket stocks.

What happened

We haven't written a lot here on The Motley Fool about Companhia Brasileira de Distribuicao (CBD -1.15%), so before we go any further, let me answer one question you may have right off the bat:

Despite the stock ticker, "CBD" is not a marijuana stock. It has nothing to do with marijuana, cannabis oil, or cannabidiol.

Companhia Brasileira de Distribuicao is a Brazilian retailer and an operator of department stores, supermarkets, and hypermarkets. CBD was up 15.6% through noon EDT.

Map of Brazil under a magnifying glass

Image source: Getty Images.

So what

Companhia Brasileira de Distribuicao appears to be rising in response to a pair of Reuters stories over the past 24 hours. In the first story, Reuters reports that Brazil's Justice Ministry is asking supermarkets to explain recent price increases on groceries in order to ensure there's no price gouging afoot.  

That sounds like bad news -- an investigation that could target CBD and potentially result in fines being levied against it. However, in a second story this morning, Reuters notes that the effect of these rising prices has been to yield "bumper retail sales" for Brazilian retailers such as CBD. Sales, says the news agency, are literally at "a six-year high," and grew four times what was expected in the first half of this year.  

Now what

And that sounds like good news for Companhia Brasileira de Distribuicao. Still, before you get too excited, pay attention to this line, buried in the middle of Reuters' second report:

"More pain may be in store for the [Brazilian] real, which is among the worst performing emerging markets currencies so far this year, down about 24%." The weakness of the currency may be one reason why prices denominated in this devalued currency are on the rise.

The higher prices go, the less consumers will be able to afford to pay them. Brazilian retailers -- CBD among them -- may be approaching the limit to how much their revenues can grow.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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