Why are Russian stocks so cheap?

[blainehodder]

I agree,

 

It is hard to go wrong with the ETFs at these levels. I am also long Gazprom though.  Valuation is just insane.

 

http://en.wikipedia.org/wiki/Russia_in_the_European_energy_sector#Natural_gas_deliveries

 

Management aside, that is a moat.

 

Tough to lose on this in my opinion.

[gg]

http://www.zerohedge.com/news/2014-03-18/white-house-reveals-biggest-threat-russia-yet-dont-buy-russian-stocks

 

 

[Guest ajc]

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.

 

Thanks for the fact sheet.

 

Those are all good points, although I think Nate has suggested on another thread that buying a basket of individual stocks (hopefully ones with less currency risk eg. oil co's, etc) is another possible approach and I agree with that.

If I was going to push the Sistema thesis, I'd say their Bashneft holding could possibly be undervalued (ie. their amazing reserve replacement ratio) and that might give you a lower true P/B multiple.

Also, if I was being really generous I'd say that Yevtushenkov seems to have negotiated intelligently with the Kremlin in the past and that together with Sistema's size therefore means that politically it is less likely to have a crappy deal forced on it and also they could potentially avoid far worse outcomes.

 

All that said though, I think the main argument you're making is very well put. And after thinking about this quite a bit in recent weeks, I've decided to just mark Russia as being in the 'too hard' category.

Right now, I figure there are a handful of businesses in places with rule of law, accounting standards, currencies and so on where I'm confident of getting my principal back together with a decent return and so as interesting as various Russian opportunities seem to be, I can't help but remind myself about my not-insignificant general ignorance of the place and why that shouldn't ever be substantially discounted when I'm trying to arrive at a final decision.

 

So, I'll skip it and stick with what I am comfortable with. Live to fight another day and maybe then some. Clearly, worse things have happened. Many Russian businesses obviously have the scars and maimings to prove it.

 

 

[fareastwarriors]

Russia Billionaires Buying Stock as BofA Says Bottom Near

 

 

 

http://www.bloomberg.com/news/2014-03-19/russia-billionaires-buying-stock-as-bofa-says-bottom-near.html

[rukawa]

"Right now, I figure there are a handful of businesses in places with rule of law, accounting standards, currencies and so on where I'm confident of getting my principal back together with a decent return and so as interesting as various Russian opportunities seem to be, I can't help but remind myself about my not-insignificant general ignorance of the place and why that shouldn't ever be substantially discounted when I'm trying to arrive at a final decision."

 

Interesting. I originally wrote a much longer answer to your question that answered this point. I too am similarly extremely ignorant of Russia. And I agree with you that individual Russian stocks are in the too hard category. But I don't think this is true for the ETF. I actually think the ETF case is quite straightforward given valuations. My basic strategy is classic Templeton. From his wonderful book, the Templeton Plan:

 

p. 64-65:

"he decided to buy every stock on the exchanges that was selling for no more than a dollar per share.....He asked his former boss...to place the order...He warned Templeton that he would do so reluctantly because 37 of the companies on hist list were in bankruptcy. "That doesn't matter," Templeton told him. "Buy everything, whether it's in bankruptcy or not"

 

p. 67

"an investor from New York who is an expert in Argentinian stocks observed to Templeton that because of Argentina's serious inflation and political instability, prices of their stocks were remarkably depressed...Templeton agreed to put up the capital, opened and an account with a bank in Argentina, and bought 800000 worth of Argentinian stocks at bargain prices"

 

And finally Warren Buffett on diversification:

"“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

 

I am ignorant and mean to go on being ignorant about Russia. So diversification makes a lot of sense.

[jouni1]

is there a way to be sure that the corruption in russia doesn't extend to oil&gas companies' reserve estimates?

 

if these numbers are as inflated as people familiar with o&g in russia say, many of these companies are overvalued and very badly managed. being p/e 5 is good only if you can make that level of profits for an extended period of time.

[tombgrt]

Does anyone know if you can buy Lukoil directly on the russian stock market (LKOH:RM ?) through IB?

[oddballstocks]

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.

 

Thanks for the fact sheet.

 

Those are all good points, although I think Nate has suggested on another thread that buying a basket of individual stocks (hopefully ones with less currency risk eg. oil co's, etc) is another possible approach and I agree with that.

If I was going to push the Sistema thesis, I'd say their Bashneft holding could possibly be undervalued (ie. their amazing reserve replacement ratio) and that might give you a lower true P/B multiple.

Also, if I was being really generous I'd say that Yevtushenkov seems to have negotiated intelligently with the Kremlin in the past and that together with Sistema's size therefore means that politically it is less likely to have a crappy deal forced on it and also they could potentially avoid far worse outcomes.

 

All that said though, I think the main argument you're making is very well put. And after thinking about this quite a bit in recent weeks, I've decided to just mark Russia as being in the 'too hard' category.

Right now, I figure there are a handful of businesses in places with rule of law, accounting standards, currencies and so on where I'm confident of getting my principal back together with a decent return and so as interesting as various Russian opportunities seem to be, I can't help but remind myself about my not-insignificant general ignorance of the place and why that shouldn't ever be substantially discounted when I'm trying to arrive at a final decision.

 

So, I'll skip it and stick with what I am comfortable with. Live to fight another day and maybe then some. Clearly, worse things have happened. Many Russian businesses obviously have the scars and maimings to prove it.

 

I spent some time on this and I'm coming to the conclusion that it's much cheaper and easier to buy the Russian ETF.  Someone mentioned on another thread, or on a blog that good hunting ground are Ukrainian companies that IPO'ed in the last decade.  They have a similar profile to the Russian stocks mentioned.

 

I'll probably pick up the ETF mentioned above today, and then nibble at the edges with a few other companies if they are cheaper.  The problem I'm struggling with is how will these stocks rebound?  If Russia is considered a terribly risky place then maybe fair value is a 10x P/E, that's a double from here.  If something like Avangardco re-rated to a 10x P/E that's a 5x gain.  If they just re-rate to a 5x P/E that's a 2.5x gain.

 

 

[rukawa]

The problem I'm struggling with is how will these stocks rebound?

\

 

I will answer this with a quote from a brilliant investor who I avidly follow:

 

"When something is cheap enough things will happen, always has and always will"

[rukawa]

Avangardco does look very interesting.

[matjone]

I bought the russian small cap index.  I wavered between that and the large cap index. The large cap has a bit lower pe and the businesses are earning higher margins and returns on equity.

[turar]

Where did you see that large cap P/E? According to this link, small cap P/E is better: http://etfdb.com/compare/lowest-pe-ratio/

[fareastwarriors]

Where did you see that large cap P/E? According to this link, small cap P/E is better: http://etfdb.com/compare/lowest-pe-ratio/

 

 

 

 

https://www.vaneck.com/market-vectors/equity-etfs/rsx/portfolio-analytics/

 

 

https://www.vaneck.com/market-vectors/equity-etfs/rsxj/portfolio-analytics/

[Phaceliacapital]

CTC is currently yielding a 11% FCF yield and +/- 8% dividend yield.

[Phaceliacapital]

Regarding Gazprom, it's not a good company to invest in because it's Putin's "playground" and he raises/lowers prices whenever he wants.. However, it's fair to assume that he will always target good overall profitability, right?

 

So as a shareholder, does this really impact us? Is it not more the case of having a company that either makes some money, or a shitload of money?

 

If you look at Gazprom's position, it's incredible, right?

 

1) Their proven gas reserves are 10x (!!) ExxonMobils and PetroChina (fun fact, they're 30x Lukoils)

2) Their total pipelines length is 168 thousand km! (including a shitload of compressor stations, distribution stations etc etc). How do you replace this?

[matjone]

Where did you see that large cap P/E? According to this link, small cap P/E is better: http://etfdb.com/compare/lowest-pe-ratio/

 

I've been a little confused yesterday about this.  I believe yahoo is using morningstar's data, which is forward looking, for its fund info.

 

A few days ago someone here posted a pdf of the RSXJ which had the pe at 4.19 on feb 28.  On the chart I looked up for feb 28 the price ranged from 35.55 - 35.02 which would imply earnings of at least 8.36/shr and a current pe of only  3.6.  I really don't know how to account for the different numbers I'm seeing.

 

Also - does anyone else feel uneasy owning ETFs in general?  http://www.cnbc.com/id/39309280

[oddballstocks]

I purchased shares in both, more in the small cap ETF, but I figured why not own the large cap one as well.  They are both cheap, why not own both?

[matjone]

On the fact sheet dated 12/31/13 for the ERUS large cap etf the pe was 10.07 and p/b of 1.56, and it is down about 20% from there.  So it seems cheap but not super cheap.  The other one that I can buy on IB is RBL, it is a little cheaper on p/b basis and on earnings, but their fact sheet is using forward earnings like other places I've seen online.

[rukawa]

I purchased shares in both, more in the small cap ETF, but I figured why not own the large cap one as well.  They are both cheap, why not own both?

 

I agree and its quite possible that the large cap etf is cheaper if you take into account the higher quality and strength of larger cap companies.

[Guest hellsten]

The World's Riskiest Stock Market?

http://online.wsj.com/news/articles/SB10001424052702304026304579449452258692302

 

At the end of February, Russia had a price/earnings ratio of 6.5 by that method, according to Cambria Investment Management. The U.S. had a P/E of 25.

 

The firm looked at the long-term P/E ratios of 44 countries at the end of each year since 1980 and found that a country's P/E dropped below 7 only 28 times out of more than 800 cumulative market years.

 

But investing in such a scenario paid handsomely. After its P/E sank below 7, a country's stock market on average went on to return 31% over the following year and 21% annually over the next five years, according to Cambria.

 

Occasionally, stocks of countries facing geopolitical crises never rebound. After the Russian Revolution in 1917, the country's stock market ceased to exist for more than 70 years.

 

Putin doesn't seem to be addicted to drugs and he hasn't suffered a stroke like some past Russian leaders. I'm betting people will forget Crimea as quickly as they forgot about Chechnya and Georgia.

[rukawa]

The World's Riskiest Stock Market?

http://online.wsj.com/news/articles/SB10001424052702304026304579449452258692302

 

At the end of February, Russia had a price/earnings ratio of 6.5 by that method, according to Cambria Investment Management. The U.S. had a P/E of 25.

 

The firm looked at the long-term P/E ratios of 44 countries at the end of each year since 1980 and found that a country's P/E dropped below 7 only 28 times out of more than 800 cumulative market years.

 

But investing in such a scenario paid handsomely. After its P/E sank below 7, a country's stock market on average went on to return 31% over the following year and 21% annually over the next five years, according to Cambria.

 

Occasionally, stocks of countries facing geopolitical crises never rebound. After the Russian Revolution in 1917, the country's stock market ceased to exist for more than 70 years.

 

Putin doesn't seem to be addicted to drugs and he hasn't suffered a stroke like some past Russian leaders. I'm betting people will forget Crimea as quickly as they forgot about Chechnya and Georgia.

 

Putin can't go too far. I actually think that Putin is good for investors. He is not a socialist. He is extremely popular and so there is no risk of regime change or revolution. He is rational. The people who have a lot of the input into the regime are oligarch's with huge business interests that will effectively act as a break against hugely irrational economic decisions.

[yadayada]

i dont think he is that popular. He is being tolerated by the russian people. There is rampant corruption, worse then ever. And the economy relies more then ever  on oil and gas. For example, his campaign where he is shown playing the piano, riding a horse with his shirt off and doing other macho shit wasn't taken very well by the russian people.

 

It is really difficult to start a small business and the majority of the russian people work government jobs. For now russia is probably safe, and i dont really know what could happen to shake this fragile balance. But russia mostly imports stuff, it doens't produce very much. So with like 7% inflation, buying power is going down rapidly with so much dependence on exports.

 

I think if the economy collapses, then you could have lots of social unrest. And alot of entrepreneurs and smaller businesses fleeing the country, it doesn't look like the future of russia looks that rosy. Especially if some scientific break through is reached where we will rely alot less on oil and gas.

 

But that is probably at least another 10 years away.

[matjone]

I think I am talking to myself, but I ran through the numbers on each of the ERUS holdings and the p/b for it is 60%, so  I think morningstar's numbers are accurate.  I am not sure how they got 1.56 p/b on the eoy fact sheet.  Russia seems like a decent gamble at this price but I probably wouldn't put too much in it because of the risk.

[thepupil]

I like sberbank and have 2% in the ADR with the intention to build as i learn more (and verify info about the ADR, I was undisciplined and was buying when there was blood in the streets before I could confirm all the particulars.

 

I'm sure it's super corrupt and has  all kinds of issues, but they make money and pay a dividend and grew book value by like 10x since 2001.

 

Sahm of Kerrisdale had a nice writeup in VIC about 30% ago (can be viewed on delay access).

 

 

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/107293

[thepupil]

Also is be aware that the big indices and ETFs probably include the more expensive internet companies like yandex , mail.ru, and some other ones I can't think of. These are much more garpy than the deep value energy and financials