The Crimea Affair….Blood in the Streets OR Putin’s Playground?
Disclosure 1: I am holding positions in RUSL and Sberbank Of Russia ADR SBRCY and may buy more/others if the SKY doesn't fall or if it does fall but doesn't permanently break anything.
Disclosure 2: If I knew anything would I be spending my time here?
Disclosure 3: My real life Due Dilligence is about 10 hours, I've been spending most of the last week DD'ing Natural Gas.
Note: This is not meant to be a political discussion. It's a financial. For now, the "situation" is what it is....
It's very hard to separate the 5 straight DOW down days from general movements, China Syndrome, (more on that another day), and the uncertainty of Ukraine. There are always multiple levels in a market that is either topping, or consolidating as it sets new highs (I believe the later, but again, not for today).
It's clear that since February the Russian Indexes and Ruble (10 year low), have taken major corrections. I started "watching" on CAPS with RUSL and thought I'd "dollar cost in" with RUSL. When both of those went heavily underwater, I started looking at other plays. Dollar cost averaging in CAPS can be done with entering in "like as" investments, but of couse it can increase the pain if you continue to be wrong (i.e. PLUG, FCEL, BLDP).
My thesis is that eventually this crisis will pass. Yes, the Russian Markets may go down more...much more, but like the bottoming in March 2009, (coincidentally five years ago), one can run and hide and miss the rebound or take small stakes, averaging in and looking for capitulation. In the short run Gold is up, but markets seem to be taking things in stride, except the Russian market. IF we start trading sanctions, then all markets could "adjust".
Europe, the largest trading partner is unlikely to have the stomach for Sanctions. The UK is one of the largest Russian investors.
Some folks are buying hard into RUSS, the 3X BEAR. I'd suggest that if nothing bad happens, they will get stuck in RUSS as it will never be this high again. Buying into Russian equities that are 20-50% down, however may result in a short term portfolio loss, but will recover at some point.
At any rate, this is a high risk, traders, thesis, not a long term buy/hold.
Looking at the Russian equities, one can start with RSX which is the base for the 3X RUSS and RUSL.
Gazprom ADR OGZPY: Sberbank Of Russia ADR SBRCY: OAO Lukoil ADR LUKOY:
MMC Norilsk Nickel JSC ADR NILSY; Novatek GDR NOVKY:
OJSC Magnit GDR MGNT; OJSC Rosneft Oil Company GDR OJSCY; OAO Tatneft ADR OAOFY;
Yandex NV YNDX; Surgutneftegas OJSC ADR SGTZY:
Of these I singled out, YNDX, (Internet) SBRCY (banking), OGZPY (Natural Gas), and LUKOY (Oil).
I screened for solid companies, without a lot of real infrastructure in Ukraine, that shouldn't be hurt too much by sanctions if this goes long. I used a baseline price from a quarter ago to separate real life from real life plus Ukraine and should pull out swings that the market put in for other reasons.
YNDX, I already had a long term CAPS call at $20.51, down 26%. YNDX is a growth stock, with a high forward P/E. While I don't think the situation will affect an intenet company much, I don't see as much potential gain if this goes long, but an excellent entry for someone who was considering it anyway as a long.
SBRCY, In the case of Skerbank it is down about 1/3rd in the last quarter. Sberbank is lightly followed as a US ADR. (1:4) Sberbank is a state owned bank, (50% Russia owned "PLUS 1" and only a few percent of it's assets are in Ukraine. P/E sub 4. P/B .77. Grew by acquisition after the 2008 crash in Turkey and Europe. 10X the deposits of it's peers in Russia.
LUKOY: Lukoil it is down about 20% in the last quarter. Russia holds a nice location as sanctions and unrest have cut off many of it's neighbor competitors for oil. Lukoil gets much of it's supply from Siberia, which other than natural resources is not a very desirable location! Lukoil trades well below current valuation, including about half book value and only 0.27 P/S.
OGZPY: Gazprom is down about 25%. As a large NG player, it has been growing, but carries some risk as Europe had a warmer winter than us and supply could be high. Overall, sanctioning your NG supplier, however can lead to issues. Putin has a large stake in OGZPY. Despite a 0.35 P/B and strong Margins, valuation of Russian stocks is typically lower than others.
On Thursday, there was a bit of capitulation in the markets and especially Russian stocks. There was a buy signal this morning. This could be a very temporary swing, however.
IF you were considering Yahoo and someone said that foreign countries were going to boycott it, would you consider 26% discount interest. What if you wanted to buy BAC, and it dropped 40% because of a possible foreign boycott? What are major owners of YNDX, SBRCY etc doing locally?
There are other interesting plays such as EPAM , down 25%, a growing software support company based in the US with a large percent of business in Central and Eastern Europe, the Ukraine situation may be preventing an increase in share price. Another growth stock, difficult to tel the true value.
Or MBT, a communication company. MBT pays a large dividend in May, expected to be higher than last year. Sometimes dividneds from foreign corporations require "extra" tax paperwork and isn't appreciated by some. Similar down is communciations company VIP.
Will the sky fall? I don't know....but I like the risk/reward long term, it's just the way I roll.
If Crimea votes to suceed, clearly it won't be recongnized by other countries, but it's strange that the child wants to emancipate and the guns aren't there to force them to do it. But then again we wouldn't allow Texas to suceed either... (I don't think), but we have an army. At any rate, I won't be buying RUSS, and I will dollar cost average if my "buy signal" turns out to be a stray cloud.
Fear in Crimea....what till James Bond gets there!
WARNING: I'm not sure what the markets will do if the missing Malaysian plane gets returnd by the aliens.
Reminder, note disclosures.