Russia: good things happen to cheap stocks

There hasn’t been much to be gained in the last year or so from suggesting that anyone invest in Russia. Not only has it not worked out yet (the investment trust I suggested last year is down 24% since but it has also started to make people very, very angry – see the comments under my most recent column in the FT.

So I was pleased that Simon Milne of Aubrey Capital pointed out to me that I am not the only one who still thinks it is worth looking at.

At this year’s Sohn Conference in New York (there’ll be a UK version on 19 November) James Grant, editor of Grant’s Interest Rate Observer, had a few things to say on one of the world’s most hated companies – Gazprom.

It is, he says, the “worst managed company on the planet,” something that should come as no surprise given that it is run by the “worst kleptocrats ever assembled on one planet”. However it is also true to say that it’s “many imperfections” are priced in, and that very often “good things happen to cheap stocks”.

What kind of good things? The first thing to note is that Gazprom isn’t all bad right now. It is massive company (revenues of $150bn) and even with the horrible management it makes a lot of money and has a “terrifically solid balance sheet.” And from here it could raise the dividend, supply more gas to China or perhaps stop investing in low payoff capital expenditures (see a list here).

His view is that solvent companies just don’t trade on price/earnings ratios of 2.5 times and yield 5% for very long. So regardless of the political climate it makes sense to buy them when they do (as long as you have a flexible timeframe of course).

As for the rest of the market, it makes sense to price in a degree of political risk, of course (although Grant insists that “this too shall pass”). But Russia expert Liam Halligan points out that the market now trades on a similar valuation to that of the 1990s. Back then, the country was massively indebted, had no reserves, and was working with an oil price of around $25. Today it has no net debts and has the third largest reserves in the world. And the oil price has quadrupled.

I know it isn’t a conventional or a popular position, but I am keeping my (still smallish) Russian holding.