Insight & action

Where the Values Are in Russian Stocks

We've heard a lot of rhetoric from Washington about Russian sanctions, but not Russian stocks. Until now:

"The beginning, middle and end to the bull case on Gazprom is good things happen to cheap stocks."

-- Jim Grant, founder, Grant's Interest Rate Observer

Mr. Grant made his case this week at the Sohn Investment Conference, where hedge fund luminaries like David Einhorn and Bill Ackman gathered to highlight their current "best ideas." Gazprom OAO (GAZP:RM) is Russia's largest energy producer, and Mr. Grant argues it is simply too cheap. He also notes it generates significant cash flow, which in turn supports a dividend exceeding 5 percent.



The global investment community apparently agrees. Today the Bloomberg index of most-active Russian stocks trading in the U.S. is rallying 2.8 percent, its largest one-day gain since April 17. We would also note a Gazprom spokesman confirmed to Bloomberg News that Russian gas continues to flow through Ukrainian pipelines, despite mounting concern regarding Ukraine's low cash balances.

Mr. Grant's observation about valuation is accurate. Gazprom OAO trades at a 59 percent discount to it 10-year average price-to-earnings ratio. Several other notable Russian companies also appear cheap.

For investors sharing Mr. Grant's optimism, we suggest the Market Vectors Russia ETF (RSX). It offers exposure to 48 Russian companies, weighted mostly to commodities (51 percent), telecommunications (14 percent) and banks (11 percent). It trades near its three-year low.

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