Russia is a basket case. Its stock market is also the most discounted one on earth.
Contrarian investing isn’t easy. If it were easy, everyone would do it. I refer to running in when everyone else is running out.
Investors have been running from Russian stocks. The Market Vector Russia Fund (NYSE: RSX), an ETF comprised of Russia’s largest publicly traded companies, is down 54% year to date. Most of the decline has occurred over the past three months.
Until early autumn, Russia’s economy had been limping along after the United States and the European Union imposed limited economic sanctions this past summer. The limp became a freefall after the recent decline in oil prices.
Energy production is the bedrock of Russia’s economy. Lower energy prices lead to lower business profits. In turn, lower profits make it more difficult to service debt, much of which is denominated in U.S. dollars.
A weakening ruble has only exacerbated matters. When the ruble weakens, debt denominated in dollars requires more rubles.
To stanch the ruble’s value hemorrhage, Russia’s central bank shocked the world this week by raising short-term rates a breathtaking 650 basis points to 17%. The move worked, if only temporarily. The ruble gained as much as 9% against the dollar before collapsing entirely.
Recent events have conjured the ghost of 1998. In the summer of that year, the Russian economy was staggering under falling productivity, soaring fiscal deficits, and artificially high fixed exchange rates. By August, Russia’s central bank had no choice but to devalue the ruble and default on its debt. The MICEX (Russia’s stock market) collapsed to 20.
Time to panic? Hardly. The subsequent recovery was almost immediate. Less than a year later, the MICEX was trading at 120.
Investors in Russia are again spooked. They shouldn’t be. I see values aplenty, particularly in energy.
LUKOIL (OTC: LUKOY) is Russia’s version of ExxonMobil (NYSE: MO). Over the past 12 months, LUKOIL generated over $148 billion in annual revenue and nearly $5.8 billion in net income. LUKOIL shares are down 42% over the past three months. The decline has pushed its P/E multiple down to 4.3, its price-to-sales multiple to 0.17, and its price-to-book multiple to 0.31. In comparison, ExxonMobil’s shares trade at 11.1 times earnings, 0.94 times sales, and 2.04 times book value.
An even more enticing value is found in natural gas.
Gazprom OAO (OTC: OGZPY) is the world’s largest natural-gas producer. Over the past 12 months, the company generated $175 billion in annual revenue and $32.4 billion in net income. Gazprom shares are down 47% over the past three months. The decline means Gazprom shares trade at a mere 1.4 times trailing 12-month earnings, 0.24 times sales, and 0.14 times book value.
Russia’s largest bank, Sberbank OAO (OTC: SBRCY), might be the riskiest bet of the three. The recent spike in lending rates will increase its cost of capital and will pressure net-interest-rate margins.
That said, it’s still a bet worth taking.
Sberbank’s shares are down 60% since late September. Its market cap has shrunk to $21 billion from $52 billion. Its shares trade at 1.8 times trailing 12-month earnings, 0.64 time sales, and 0.32 times book value. In comparison, Wells Fargo (NYSE: WFC) trades at 13.2 times earnings, 3.3 times sales, and 1.7 times book value.
To be sure, things could get worse with Russia’s economy, as well as these three stocks, before they get better. But if you can stand the negative news and bear the short-term risk, you won’t find more enticing value than that found in Russia’s stock market today.
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