Russia seems to be in terrible shape. Just this morning, the central bank cut interest rates from 14% to 12.5% to boost growth. The stock market has fallen so far that Russia is now worth less than Apple (NASDAQ: AAPL).
Apple, the world’s most valuable company, has added over $200 billion to its market cap over the past year and is worth $735 billion.
As you know, market capitalization is the purest form of value. You take all shares outstanding and multiply it by the share price. That gives you the current value for any market or stock.
All public Russian equities combined now have a market capitalization of $510 billion. I’ll tell you how to profit from this.
Buy Low
The first thing they tell you about investing is “buy low and sell high.”
The problem is, of course, that no one does this — by definition. If everyone bought low, it would no longer be low.
Furthermore, it would use up all the buyers. With no one left to buy, it would be high with only sellers left.
You see the problem? If you do buy low by nature, you go against the crowd, and they call you a contrarian investor.
John Templeton is perhaps the world’s best-known contrarian investor. You may know him as the billionaire that invented the mutual fund and invested in emerging Japan in the 1960s.
But even as a young man, he was swimming against the tide. In the middle of the Great Depression, he bought 100 shares of each of the NYSE-listed companies that were selling for less than $1. Only four of the 104 ended up being worthless. The rest he sold for an average price of $17.
He was out of Japan before the top and into the U.S. in the 1980s. In the 1990s, he didn’t buy YHOO — he bought commodities instead and rode the supercycle as oil went from $12 to $149.
Templeton believed in buying shares at the point of maximum pessimism.
What Would John Buy (WWJB)?
It would be hard to find a more pessimistic place than Russia right now. The Russian ETF is trading just above its 2009 low.
That said, Russia is up 39% this year as it bounced off the extreme bottom. And investors are buying Russian stocks due to value.
It is so cheap that the largest producer of natural gas in the world — the company that owns the most miles of pipelines on earth — is selling for a price-to-earnings of just 2.5. This same company had revenues of $45 billion last year, has a market cap of $12.69 billion, and trades for less than a third of book value.
That means you could sell the company lock, stock, and barrel and triple your money! That’s absurd.
Many of the Russian stocks are like that. One of the largest banks trades with a P/E of 5.4.
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A Bear’s Bear
Of course, they are cheap for a reason.
The economy is ugly. GDP is falling down 2% in Q1 and expected to fall 4% for the year. The ruble got crushed last year but is bouncing. And Brent crude, of course, is now at $66.41, well off $120 — but still, it’s trending up and is at a five-month high.
Perhaps the biggest news is that the uptrend in the U.S. dollar has broken. Yellen won’t hike rates, and the euro doesn’t look quite so bad as it did.
A falling dollar drives up the ruble and the price of oil, both of which are beneficial to those who invest in Russian stocks.
Land Wars in Asia
Sanctions were put on Russia by the West as a punishment for taking Crimea and causing trouble in Ukraine. That was the hard bottom of the Russian stock market.
Since then, things have lightened up a bit. The world’s attention has moved on to other worries, and the ceasefire in Ukraine seems to be holding.
The big boys like HSBC are buying Russian government bonds, which yield 11.21%.
As I’ve written in this space before, the Russian government — unlike the U.S., Japan, France, etc. — has a current account surplus of $235 billion, with very little corporate or household debt. Debt to GDP is 13%, a number lower than almost any other country in the world.
This means when the economy bounces back, it will come fast. There won’t be five years of paying off debts.
There are two basic catalysts for a boom: The price of oil goes up and/or the sanctions are removed. Oil is already moving up, and as Keith Kohl has been writing, there is a big chance for a surge in the second half of the year as hedges expire.
The EU will vote on renewing the sanctions in July. The herd believes they will be renewed. But there are plenty of German companies that are putting pressure on the EU leaders to end the sanctions, and the French President, Francois Hollande, has said he wants the sanctions to end.
The time to buy Russia is fast approaching. Look for my special report over the next few weeks.
Buy low,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
