Why are Russian stocks so cheap?

[yadayada]

it seems that if they paid dividends/stock buybacks, and it is a good business trading at a cheap multiple, the corruption is probably already factored in when you look at the bottom line. Lets say a company makes 50 million$ a year. Cost of goods sold is like 250 million, then corruption is probably already part of this 250 million$ cost. In the US COGS might be only 210 million $ for the same company.

 

So if you can get this company for a PE of 5, it seems that corruption has to go up by alot over the next years to make it a bad investment. And COGS has to go up another 20 million$ in corruption or so for you to break even. But if COGS has been steady over the past years, that seems unlikely? Especially if it will hurt the country. Because at some point corruption will actually hurt putin you would think.

[Liberty]

it seems that if they paid dividends/stock buybacks, and it is a good business trading at a cheap multiple, the corruption is probably already factored in when you look at the bottom line. Lets say a company makes 50 million$ a year. Cost of goods sold is like 250 million, then corruption is probably already part of this 250 million$ cost. In the US COGS might be only 210 million $ for the same company.

 

So if you can get this company for a PE of 5, it seems that corruption has to go up by alot over the next years to make it a bad investment. And COGS has to go up another 20 million$ in corruption or so for you to break even. But if COGS has been steady over the past years, that seems unlikely? Especially if it will hurt the country. Because at some point corruption will actually hurt putin you would think.

 

But what if you can't trust the financial statements, or that contracts will be enforced? That's another way in which corruption/weak institutions can screw you.

[yadayada]

Shouldnt you see that in the cash flow statements? I supose if they are expanding then it could be problematic to see that. But if it is a steady eddy business, they should generate alot of free cash flow right?

 

And ofcourse make sure the free cash flow doesn't come from selling off assets or other questionable stuff.

[EliG]

Those of you thinking about buying Russian ETF, read Ben Inker's (GMO) thoughts on lagged value. Buying countries that were the cheapest one year ago beats buying countries that are the cheapest today. Value+Momentum > Value. See Page 11.

 

http://www.gmo.com/websitecontent/GMO_QtlyLetter_ALL_4Q2013.pdf

 

[constructive]

Those of you thinking about buying Russian ETF, read Ben Inker's (GMO) thoughts on lagged value. Buying countries that were the cheapest one year ago beats buying countries that are the cheapest today. Value+Momentum > Value. See Page 11.

 

http://www.gmo.com/websitecontent/GMO_QtlyLetter_ALL_4Q2013.pdf

 

Russia was the cheapest market a year ago too.

[Palantir]

If you're getting dividends you will worry less even if your stock stays cheap.....

[ERICOPOLY]

If you're getting dividends you will worry less even if your stock stays cheap.....

 

It distresses me to pay taxes when there is no gain.

[plato1976]

what's the next cheapest country one year ago ?

I think one of those EUR countries that were in trouble ? Spain ?

 

Those of you thinking about buying Russian ETF, read Ben Inker's (GMO) thoughts on lagged value. Buying countries that were the cheapest one year ago beats buying countries that are the cheapest today. Value+Momentum > Value. See Page 11.

 

http://www.gmo.com/websitecontent/GMO_QtlyLetter_ALL_4Q2013.pdf

 

Russia was the cheapest market a year ago too.

[Zorrofan]

Part of it is much of Russia is a kleptocracy led by the government. 

 

Putin has already threaten to seize "Western" assets if sanctions are imposed.  So on top of everything else you have to add increased political risk......remember the quote about the return OF your money being more important than the return ON your money!

 

cheers

Zorro

[Palantir]

If you're getting dividends you will worry less even if your stock stays cheap.....

 

It distresses me to pay taxes when there is no gain.

 

I have a Roth...although the tax withholding might be a concern.

[augustabound]

what's the next cheapest country one year ago ?

I think one of those EUR countries that were in trouble ? Spain ?

 

 

For year end 2012 I thought the cheapest were Greece and Ireland.

[constructive]

http://www.businessinsider.com/the-cheapest-stock-markets-in-the-world-2013-3

 

Russia, Argentina, China and Norway were cheapest on PE, Greece and Ireland cheapest on CAPE.

[EliG]

May 31, 2013

 

http://i.imgur.com/cQeM9ym.jpg

[augustabound]

http://www.businessinsider.com/the-cheapest-stock-markets-in-the-world-2013-3

 

Russia, Argentina, China and Norway were cheapest on PE, Greece and Ireland cheapest on CAPE.

 

Yes, I should have added I was using Mebane Faber's CAPE for Greece and Ireland.

[Mephistopheles]

Just a thought, but for a company like lukoil which has American shareholders but also American operations (and around the globe), wouldn't there be consequences for Putin if he decides to take shareholder money? American authorities could cause problems for their American operations for example. Given that they operate (and have shareholders) all over the world I would think that Putin would think twice before treating them as his piggy bank.

[Packer16]

Although the threat is there, I have only seen an example of a firm is owned by a political rival (Yukos).  So I see the saber rattling louder than the actual action here.

 

Packer

[rukawa]

Putin has already threaten to seize "Western" assets if sanctions are imposed

 

Which probably means he will seize the Russian assets of companies domiciled in Western countries not that he will seize the shares of American shareholders of Russian companies. To me it would be a pretty stupid move if he did. All it means is that Russian companies would no longer have access to international capital markets which hurts Russian companies and it won't really have any effect on Western countries, governments or powerful stakeholders.

 

I actually vastly prefer Russia to countries like India which trade at much higher multiples. India is extremely corrupt but on top of this its a democracy and I think this is really bad. Most Indian voters are poor and uneducated and all they care about is that politicians hand out goodies. I actually think a Russian dictatorship is much better protector of property rights than Indian democracy. Putin and his cronies aren't stupid. He may beat the goose and kick it but he won't kill it. Indian voters on the other hand are quite happy to beat it close to death, not eat it and then leave it out on the street where it can be half eaten by feral dogs.

[one-foot-hurdles]

Putin has already threaten to seize "Western" assets if sanctions are imposed

 

Which probably means he will seize the Russian assets of companies domiciled in Western countries not that he will seize the shares of American shareholders of Russian companies. To me it would be a pretty stupid move if he did. All it means is that Russian companies would no longer have access to international capital markets which hurts Russian companies and it won't really have any effect on Western countries, governments or powerful stakeholders.

 

I actually vastly prefer Russia to countries like India which trade at much higher multiples. India is extremely corrupt but on top of this its a democracy and I think this is really bad. Most Indian voters are poor and uneducated and all they care about is that politicians hand out goodies. I actually think a Russian dictatorship is much better protector of property rights than Indian democracy. Putin and his cronies aren't stupid. He may beat the goose and kick it but he won't kill it. Indian voters on the other hand are quite happy to beat it close to death, not eat it and then leave it out on the street where it can be half eaten by feral dogs.

 

Gee thanks for the vivid imagery!

[yadayada]

they should change democracy, so you vote for ideas. And when you vote for ideas, they explain to you what the implications of those ideas are. And then when the people have voted, Random people who volunteered from the scientific community will be randomly selected to execute this for a very large compensation. And then after set periods, it will be evaluated how well they executed within the economic cycle, and people will vote if this will have to go on.

 

Just think how well that would work. You vote, 'let the government take everything!' . Followed by a 'are you sure? This will ruin the economy' and 'would you start a business and create jobs if the government could take it away anytime?'.

 

And it would eliminate voting for some popular airhead to be your leader. You take some of the human bias out of it, charisma cannot mess with the whole equation here.

[anders]

Cant give a good answer except that well run family companies that know the russian market better than most of us recently put up their russian assets for sale.. That is enough reason for me not to invest in russia no matter the price tag..

 

Rgds,

[rukawa]

"Cant give a good answer except that well run family companies that know the Russian market better than most of us recently put up their Russian assets for sale.. That is enough reason for me not to invest in Russia no matter the price tag"

 

Good. I am counting on people thinking this way. Too me price tag ALWAYS matters.

 

Second investing in a stock vs a family business are not the same things. Its quite possible that the family is making the right decision but that it is also true that stocks in Russia are undervalued. And the reverse may also be true. For instance an industry may be extremely profitable and yet stock valuations are unrealistically high.

[Shawn]

I don't know about Russia, but what you said about the small caps & them being too small for Putin was very clever. The small cap Russian ETF you mentioned will probably work out well for you.

 

I wouldn't do it though. If you don't need it then you don't have to do it. There's more economically stable countries, though there may not be as many bargains the bargains are there if you look hard enough. Only Russian companies I can think of that are worth investing in are Lukoil, and perhaps Yukos, maybe even Gazprom too but I don't know enough about that one. For me Russia is outside my circle of competence.

 

Keep us updated on how it works out though.

[Guest ajc]

 

Intro on Russian conglomerate JSFC Sistema from the ValueAndOpportunity blog:

 

As the first company to analyse in Russia, I used Sistema, a major Russian conglomerate.

Why so?

 

Three major reasons from my side:

- Sistema is a conglomerate, so it offers a broader exposure to Russia

- it seems to be a large and relatively well-connected company. So the risk of being bullied like Pharmstandard looks remote

- Shares of the company are listed widely, in the US, London and Germany

 

This is how Sistema describes itself on its homepage:

"Incorporated in 1993, Sistema is now one of Russia’s top-10 companies by revenues and is one of the largest publicly traded diversified holding companies in the world. Sistema was ranked number 315 in the Fortune Global 500 list."

 

Valuation wise, Sistema looks ridiculously cheap as many Russian companies:

 

P/E 4.9      P/B 0.9        Div. Yield 2.6%        Market Cap: 7.1 bn EUR            EV/EBIT ~4.1x

 

http://valueandopportunity.com/2014/03/12/emerging-markets-part-3-jsfc-sistema-adrs-isin-us48122u2042-is-a-russian-company-investible-1/

 

 

[Guest ajc]

 

Part 2 (the substance) of the JSFC Sistema thesis from Value And Opportunity. Looks interesting.

 

http://valueandopportunity.com/2014/03/17/emerging-markets-part-3-jsfc-sistema-adrs-isin-us48122u2042-is-a-russian-company-investible-2/

 

 

[rukawa]

Part 2 (the substance) of the JSFC Sistema thesis from Value And Opportunity. Looks interesting.

 

I really like this website. The thesis is very interesting however I am strongly against investing in individual Russian stocks (changed mind about Gazprom). This is one case where diversificaiton is your friend. There are several reasons for this:

 

On the website itself the author describes a situation:

Some readers may recollect that I invested into the Russian pharmaceutical company Pharmstandard last year and was very lucky to get out early before the stock subsequently lost more than 50%. My interpretation of this experience is that an actually relatively well-managed company got bullied into buying a worthless company and thereby shifting a lot of company funds to some shady people. 

 

This is the peril of corruption in Russia and its a big danger when investing in individual stocks. Corruption/No Rule of Law results in very large and unpredictable idiosyncratic risks but has a much smaller effect when you diversify.

 

In addition the RSXJ has a P/E of 4.19 and a price to book of 0.31 (see attached RSXJ factsheet). That is a difficult hurdle for any individual stock to exceed. Sistema for instance is more expensive and has far greater idiosyncratic risk.

 

The only way investing in an individual stock can be justified given the huge idiosyncratic risk is if it is extremely cheap. And then you have to make sure that its investible and the better risk/reward characteristics of the stock have to be large enough to outweigh the additional research effort involved. I would argue there are probably no individual Russian stocks that satisfy this criterion.

RSXJ-Factsheet-0214.pdf