Why are Russian stocks so cheap?

[rukawa]

I was reading WSJ and noticed that the Russia has one of the lowest emerging market PEs. Right now it is about 4.5. Greece is a lot higher than I expected...I am guessing because of cyclically low earnings.

 

http://online.wsj.com/news/articles/SB10001424052702304281004579222303336597192

[ItsAValueTrap]

Some people think that Russian stocks have very high levels of corruption.

[Packer16]

Part of it is much of Russia is a kleptocracy led by the government.  There are some good cheap companies there like Lukoil but firms like Gazprom are tied into the government with product pricing determined by Putin et al.  If you can seperate out the good from the bad, there are some bargains there.

 

Packer 

[JBird]

Part of it is much of Russia is a kleptocracy led by the government.  There are some good cheap companies there like Lukoil but firms like Gazprom are tied into the government with product pricing determined by Putin et al.  If you can seperate out the good from the bad, there are some bargains there.

 

Packer

 

+1

[Pauly]

I'm keeping an eye on the Sberbank thread, but when you read stories about how the Russians have managed to run up a $50 billion bill for a Winter Olympics it makes you think that Russia is a great place to make money vanish into thin air.

 

I'm sure it's that risk that's keeping their market cheap. My guess is that it's a market that will produce some big winners, and a lot of catastrophic losses.

[turar]

See Yukos: http://en.wikipedia.org/wiki/Yukos

 

[Guest wellmont]

because they are stocks in russia.

[JBird]

I'm keeping an eye on the Sberbank thread, but when you read stories about how the Russians have managed to run up a $50 billion bill for a Winter Olympics it makes you think that Russia is a great place to make money vanish into thin air.

 

HBO's Real Sports did a segment on the Sochi games. The level of corruption is hard to believe, even for Russia. They built a ~30 mile road from the Olympic square to the Ski/Snowboarding mountain. For $9 billion USD. And of course the contractor is Government-owned Russian Railways. The program also mentioned that the total cost for the Olympics will be around $50 billion, which is roughly equal to the cost of all previous winter Olympics combined.

[peterism]

Because there are just two types of investors in Russia. Those who lost their money and those who will loose their money.

[Palantir]

In Soviet Russia, stocks short you!

[hardcorevalue]

In Soviet Russia, stocks short you!

 

+1

[Lance]

Russia is sort of interesting to me.  It's not for the faint though.  I hold Gazprom and Lukoil and have considered the ishares Russian etf.  Check out Jim Grant's comments on Russian energy stocks: 

 

http://www.cnbc.com/id/101033958

 

Thanks,

Lance

[rukawa]

So the argument is that the proper PE for Russian stocks is zero? Surely even with incredible levels of corruption there is a price which is too low? Also India is highly corrupt and yet their valuations are much higher.

[fareastwarriors]

So the argument is that the proper PE for Russian stocks is zero? Surely even with incredible levels of corruption there is a price which is too low? Also India is highly corrupt and yet their valuations are much higher.

 

“You can’t make a good deal with a bad person.” - WEB

 

 

There might be some value but at what price are you willing to pay?

 

[JBird]

“You can’t make a good deal with a bad person.” - WEB

 

There might be some value but at what price are you willing to pay?

 

At half of the value estimation.

 

"I think if it’s cheap enough, you can afford more country risk or regulatory risk. It’s not complicated." CM

 

We're all seeing the same thing here. Russia's Government is corrupt. But this doesn't mean their entire stock market is valueless.

 

It's like investing in China where you have a Government sorely lacking in repute and virtue. There's this miasma of corruption and gross immorality in the markets. And in '04 there was PetroChina... selling at $36 billion. You could have said, the Government is a majority shareholder, this could all go wrong, and so many Chinese companies are frauds. And you'd have been right. There is a possibility of loss-- total loss. But estimate the odds for the possible outcomes. Are the odds in your favor? After you answer that I don't think you need to ask anymore questions.

[plato1976]

What's the discount of large russian big oil like lukoil against majors in OECD countries ?

If the discount is bigger than 70% I will be glad to consider it...

 

“You can’t make a good deal with a bad person.” - WEB

 

There might be some value but at what price are you willing to pay?

 

At half of the value estimation.

 

"I think if it’s cheap enough, you can afford more country risk or regulatory risk. It’s not complicated." CM

 

We're all seeing the same thing here. Russia's Government is corrupt. But this doesn't mean their entire stock market is valueless.

 

It's like investing in China where you have a Government sorely lacking in repute and virtue. There's this miasma of corruption and gross immorality in the markets. And in '04 there was PetroChina... selling at $36 billion. You could have said, the Government is a majority shareholder, this could all go wrong, and so many Chinese companies are frauds. And you'd have been right. There is a possibility of loss-- total loss. But estimate the odds for the possible outcomes. Are the odds in your favor? After you answer that I don't think you need to ask anymore questions.

[cr6196]

Well this thread makes the answer obvious, the perception of corruption. I don't see any actual appraisal of the risk though, the situation in Russia is certainly more complicated than "bad government"...go back fifteen years and the government was the victim, not the perpetrator, of theft. Russian billionaires have pulled off quite a PR coup in this regard...after stealing state assets using state money they convince everyone that the state is the problem. Either way, to find out if Russian stocks really are cheap (not why they are cheap) I think you have to understand the situation on its own terms. To me this suggests, at least, that the current situation isn't black and white. The current government has done far better than the "business-friendly" ones of the 1990s. Also there are obviously some well-run businesses outside of O&G, Magnit being perhaps the best known.

[fareastwarriors]

http://www.bloomberg.com/news/2014-01-02/gazprom-top-pick-to-bernstein-for-2014-russia-overnight.html

 

 

Gazprom Top Pick to Bernstein for 2014

[jouni1]

At half of the value estimation.

 

"I think if it’s cheap enough, you can afford more country risk or regulatory risk. It’s not complicated." CM

 

We're all seeing the same thing here. Russia's Government is corrupt. But this doesn't mean their entire stock market is valueless.

 

It's like investing in China where you have a Government sorely lacking in repute and virtue. There's this miasma of corruption and gross immorality in the markets. And in '04 there was PetroChina... selling at $36 billion. You could have said, the Government is a majority shareholder, this could all go wrong, and so many Chinese companies are frauds. And you'd have been right. There is a possibility of loss-- total loss. But estimate the odds for the possible outcomes. Are the odds in your favor? After you answer that I don't think you need to ask anymore questions.

 

for me it's super important to understand the country i'm investing in, at least on some level. russia is not a place i (or anyone not russian) can properly understand. the culture and way people think are just so different from what i'm used to.

 

so at some ridiculous P/E 1 valuation i might invest, but in the end i'd much rather do 10% per year in civilized countries than 20% in russia.

 

the point being, russia might not be as fair to investors as americans have come to expect if shit hits the fan. this makes it uninvestable for me. -100% feels like a possible outcome. in 30-40 years i'm probably going to feel like an idiot because of this, but thats life  8)

[CorpRaider]

I personally don't like investing in places where there aren't good property rights and a solid tradition of rule of law.  Putin is likely to take your cookies if he wants them.  If enough people feel the same way it might result in lower multiples.

[rukawa]

I have decided to invest in Russia. I know little about the country, little about the politics and I believe the country is very corrupt. But at a 4 p/e I think it doesn't matter. I am considering two investments:  Market Vectors® Russia Small-Cap ETF and Gazprom. Gazprom sells at like a 2  p/e and its State owned and its basically a piggy bank for the corrupt Russian government.

 

Putin will probably take my cookies from Gazprom but at a 2 p/e how many cookies is going to get? And he isn't going to touch small cap Russian companies...just too small. To me this is a no-brainer by which I mean you need little research or understanding to make these investments. The low valuation is so important it overwhelms everything else.

[plato1976]

I find this argument very convincing:

 

"he isn't going to touch small cap Russian companies...just too small. "

 

 

I have decided to invest in Russia. I know little about the country, little about the politics and I believe the country is very corrupt. But at a 4 p/e I think it doesn't matter. I am considering two investments:  Market Vectors® Russia Small-Cap ETF and Gazprom. Gazprom sells at like a 2  p/e and its State owned and its basically a piggy bank for the corrupt Russian government.

 

Putin will probably take my cookies from Gazprom but at a 2 p/e how many cookies is going to get? And he isn't going to touch small cap Russian companies...just too small. To me this is a no-brainer by which I mean you need little research or understanding to make these investments. The low valuation is so important it overwhelms everything else.

[turar]

I find this argument very convincing:

 

"he isn't going to touch small cap Russian companies...just too small. "

 

 

For one Putin there are hundreds lower-level officials in his court and protection, for whom they won't be too small.

[Packer16]

If you look at the composition of the ETF I think you will find strategic sector companies (gas pipelines, electricity generators/distributors and airlines) that Putin may take the cookies too.  One note about Russia is that there has only been one nationalization (Yukos) and that was run by a guy who actively opposed Putin politically.

 

Packer

[Palantir]

I've been drinking, but CTCM looks good. I'd prefer to stay away from strategic assets like energy or minerals, and focus on firms that are paying dividends from their FCF.