The Putin Effect: How Russia’s President Doubled This Top Stock

Putin-EffectOne of the hottest stocks of 2015 comes from one of the most beleaguered economies in the world: Russia.
Mechel OAO (NYSE: MTL) stands apart from the other top stocks of 2015 because it is the only one of this year’s 20 top performing stocks that isn’t a biotechnology or drug company. It’s also the only Russian stock in the group.
How is this one Russian company doing so well? I call it the “Putin Effect.”
Indeed, when I ran a stock screener to view the best performing stocks of the year – excluding those under $300 million – the consistent trend is that these stocks are all involved with biotechnology or drug therapies. With one exception.
Mechel stands alone.
The company is an integrated mining and steel company. Why, you ask, is this boring steel company up more than 130% in the first three months of 2015? You can thank Russian President Vladimir Putin and the effect that his government policies are having on certain Russian stocks.
Earlier this year, the Russian Ministry of Economy announced that it was creating a list of 199 major Russian companies “of strategic importance” that would be eligible for state assistance. The plan is a bailout of sorts, essentially designating the companies on the list as “too important to fail.”
The “of strategic importance” designation means that the Russian government will essentially guarantee a company’s debts and give it access to cheap financing. It’s basically a floor for these companies.
And, since Mechel was deeply in debt and in need of refinancing, it has especially benefited from the designation.
To be fair, a long-term shareholder of Mechel isn’t as excited about the 136% gain in 2015 as you might think.
The stock fell by more than 60% in 2013, and by more than 70% in 2014. Even after jumping 136% higher so far this year, the stock is still down 76% since the start of 2013.
Shareholders of Russian stocks that have been added to the government list should know that the Russian government used a similar strategy successfully in 2008-2009. In this case, the government has said it will spend $200 billion on the program. The source of these funds is unclear, however.
Ivan Manaenko, head of research at Moscow-based Veles Capital LLC, offered a concise analysis of the situation.
“The understanding is that the companies on the list will be able to get cheap financing, and get it quickly,” Manaenko stated. “The same approach worked during the previous crisis in 2008-2009 and there is no reason to think it won’t work this time, even though the exact mechanism isn’t known yet.”
Mechel is far from the only stock to benefit from the Putin Effect.
Oil and gas giant Lukoil (OTC: LUKOY) is up 13% on the year. Telecommunications juggernaut Megafon OAO (MCX: MFON) is up 12% this year. Gas pipeline company Gazprom (OTC: OGZPY) is up around 10% since it was added to the list.
Though these moves are significantly less dramatic than that of Mechel, there’s no doubt in my mind that they are the result of the Putin Effect.
For investors in these companies, the Putin Effect should serve as a confidence-building floor to these stocks. It’s similar to the “Bernanke Put,” which gave confidence to the U.S. markets during the early stages of the former Federal Reserve chairman’s policy of quantitative easing.
The only problem is that confidence in the Putin Effect requires confidence in the Russian economy, the economic ministers and even Vladimir Putin himself.
If you’re considering buying the aforementioned Russian stocks, you’ll have to ask yourself: Do I trust the Putin Effect?

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