It is with a heavy heart that I write today’s Wealth Daily letter. I have to do something I don’t really want to do, because I find it morally repugnant. But I remind myself that I have taken a personal vow to act as a sort of fiduciary to you, the Wealth Daily reader.
Yes, I know that means I am willing to put your financial interests above my own. It’s not really that difficult a position for me to be in — I simply have to offer up my best moneymaking ideas and analysis in an unbiased way.
The only problem I have is when I find what looks like a no-brainer profit opportunity that I really, really don’t want to recommend because it challenges my values.
In this case, I am talking about Russia. Or more specifically, Russian stocks. I think it’s time to buy a select few Russian stocks — only I can’t get too excited about it because I am deeply ticked off by Vladimir Putin’s reckless warmongering.
I’ve made my views on Putin well known. He is a thief, a bully, and a liar. He had absolutely no problem starting his little “rebellion” in Ukraine — which has killed over 5,000 people — just so he can annex a little more land and hold sway over the Ukrainian government, keeping it from joining NATO.
Now, if you want to argue that the U.S. deliberately abandoned the moral high ground when we invaded Iraq, that’s fine. Because we did. The U.S. government condemned 4,491 American servicemen and women to die (through 2014) all for a pack of lies about WMDs and Al-Qaeda. Estimates are that over 112,000 non-combatant Iraqis died, too.
It’s sickening, made worse by the fact that we made only a half-hearted effort to get the real enemy in Afghanistan.
There’s no way to argue that Putin’s quasi-invasion of Ukraine is any worse than what the U.S. did in Iraq. There is no moral high ground here. Maybe that makes it a little bit easier to recommend Russian stocks to you…
A Simple Plan
If you’ve followed the Russia/Ukraine situation at all, you probably know that a ceasefire between Ukraine and Russia was brokered by Germany and France a couple weeks ago. You may also recall that the Russian military… er, I mean the Russian “separatists”… made a huge push deeper into Ukraine as the ceasefire talks began.
This last-minute escalation was quite deliberate. It got more territory into Russia’s hands before the ceasefire agreement froze the action. Now, both sides can basically keep what they have. And for Putin, that might well be enough for a more lasting ceasefire… for now, anyway.
He’s achieved a land bridge all the way to Crimea. He’s boosted his popularity at home. And he’s established that the European Union is not going to do anything substantive to stop him. Europe is even eager to back down from the sanctions that have been imposed on Russia.
All Putin has to do to be the clear winner in Ukraine is back off.
I’m not going to call Putin a smart man. It didn’t take smarts to pull this off. All it took was desire, willingness, and the most basic game planning.
It’s like bringing a sack full of cheeseburgers into a room full of vegetarian pacifists — what’re they gonna do? Ask you politely to stop? And when you don’t? They’re not going to force you, that’s for sure. More likely avert eyes and pray the horrible meat eating will end soon.
Well, Putin has just finished his meal. Now, he can sit back and watch Europe and the U.S. act like nothing happened and slowly dismantle the sanctions until things are back to normal.
That is, until ol’ Vlad gets hungry again…
Time for a Digestive
I find it easy to imagine that Putin will now push his chair back from the table, maybe have a cognac and a cigar, and digest his gains. Because he’s won. He got what he wanted, and he didn’t pay a very big price.
Europe and the U.S. will be eager for things to return to normal, and that’s my base case for buying Russian stocks right now.
It’s an old stock market adage: Buy when there is blood in the streets. And the blood in the streets of Donetsk and Mariupol is still pretty fresh…
Here’s a two-year chart of the Market Vectors Russia ETF (NYSE: RSX)…
18 months ago, the RSX was up around $28. It’s been as low as $12.50 and currently sits around $17.80. Roughly half of that move off the lows has come in the last month as investors anticipate the resolution of the Ukraine situation.
The RSX is oil and gas heavy — the biggest holdings of the ETF are Lukoil (8.65%) and Gazprom (7.43%). Interestingly, the rally for RSX has also coincided with the recent lows for oil prices. Both Lukoil and Gazprom have rallied ~25% in the last month.
I’m a little leery of Russian oil stocks because they are obviously tied to global oil prices. Oil prices have rallied, yes, but for this scenario, I want to narrow the number of variables that can act as catalysts.
In other words, I don’t want this trade to get undermined by falling oil prices. I want Russian stocks that will trade exclusively on the Russia/Ukraine situation.
Fortunately, the list of Russian stocks that aren’t related to oil and gas is pretty short, because Putin completely failed to encourage a diverse Russian economy.
So here are my two choices, with charts…
Yandex (NASDAQ: YNDX)
Yandex is an Internet company, along the lines of Google and Yahoo!. Even though it’s based in the Netherlands, Yandex offers Russian mobile location services, email, search, e-commerce, and so on.
Over the last 12 months, revenues were right around $900 million, and the net profit margins were a very healthy 33%. At ~$16.50, the trailing P/E is around 5. The stock is down more than 50% from its 18-month highs above $42.
International sanctions have caused analysts to lower forward earnings estimates by around 25%, but the stock has sold off much more than that. Yandex itself has forecast that forward revenue may fall 15% in the current quarter but hasn’t pushed its forecasts out further than that.
Even if that lower forecast pushed the P/E as high as 10, there is still a compelling case to be made for Yandex stock.
If it looks as though sanctions can slowly get lifted, Yandex can easily trade into the mid-$20s, 50% higher than current levels.
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Qiwi PLC (NASDAQ: QIWI)
Qiwi offers electronic payment systems in Russia and former Soviet countries. Analysts have lowered forward earnings per share estimates by around 30%, largely because Qiwi revenue is mostly rubles, and the ruble is down 45%.
In its most recent quarterly earnings report, Qiwi net income grew 69% from $13 million to $24 million. EPS grew from $0.86 to $1.52. So even with a pretty severe decline to income, the company can still show a bit of growth.
Credit Suisse has a $31 target for the stock, which currently trades around $23…
Qiwi shares were in the $50s a little over a year ago. I think they can trade into the mid-$30s as the Ukraine situation eases.
Look for Value
U.S. stock valuations are pretty high right now. That’s not to say they will sell off immediately, but it does mean investors should look for value. And you certainly get that with Russian stocks.
Yes, there are still risks, but with the potential gains as high as 50% over the next few months, I think it’s worth it.
Until next time,
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
