Why a Contrarian is Betting Big on Russian Stocks

Photographer: Andrey Rudakov/Bloomberg

Construction cranes operate beside new skyscrapers being built at Moscow International Business Center, also known as Moscow City, in Moscow, Russia, Sept. 13, 2013. Close

Construction cranes operate beside new skyscrapers being built at Moscow International... Read More

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Photographer: Andrey Rudakov/Bloomberg

Construction cranes operate beside new skyscrapers being built at Moscow International Business Center, also known as Moscow City, in Moscow, Russia, Sept. 13, 2013.

There's buying cheap stocks everyone else hates. Then there's buying cheap Russian stocks everyone else hates.

Even among veteran value investors, wading into Russia is controversial. But with some stocks trading at what contrarian investor Dave Iben figures is half of what they're worth, or less, he's buying. In 33 years of value investing, it may be his most extreme move ever, says Iben.

Before launching his own money management company last year, Kopernik Global Investors, Iben delivered a 116 percent return from late 2004 through the first quarter of 2012 at the Nuveen Tradewinds Value Opportunities fund (NVORX). The S&P 500 gained less than 40 percent over the same period. Then, in June, 2012, former Fidelity Magellan Fund manager Jeffrey Vinik recruited Iben to his hedge fund -- and closed it 11 months later. Vinik was one of Kopernik's first clients.

The $890 million Kopernik Global All-Cap mutual fund (KGGAX) has about 15 percent of assets in companies such as OAO Gazprom (OGZPY), RusHydro JSC (RSHYY), Federal Grid Company of Unified Energy JSC (FGCUL) and Sberbank of Russia (SBRCY). The average global fund has 1 percent of assets riding on Russia, according to Morningstar. The Russian Federation makes up just 5 percent of the MSCI Emerging Markets Index.

David B. Iben is chief investment officer of Kopernik Global Investors LLC Close

David B. Iben is chief investment officer of Kopernik Global Investors LLC

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David B. Iben is chief investment officer of Kopernik Global Investors LLC

In June, Iben had taken profits on some Russian stocks in his portfolio after the Micex Index, Russia's leading stock index, rallied a 15-month high. Then tragedy came in July with the downing of Malaysia Airlines Flight 17. Russian stocks fell, and Iben started buying. The Micex has lost 7.7 percent since Russian President Vladimir Putin's incursion into Crimea in March, and the benchmark index trades at 4.8 times estimated earnings, making it the cheapest measure among 21 emerging markets tracked by Bloomberg.

Related: Russia Favorite With Banks to Energy Unless Sanctions Hit

To compensate for the risk, Iben only buys Russian stocks he calculates trade at a discount of 50 percent or more. With the forward price-earnings ratio of emerging markets near 12, it would take a price-earnings ratio of 6 to get him interested in a stock, he says. “Right now the market says we can have Gazprom at 2.5 times earnings, so we say ‘done,’” he says.

Beyond the Ukraine tensions and threat of more sanctions, Iben says Putin making a grab for some of Russia’s investment jewels is a longer-term risk. But he doesn’t foresee a situation where Russia/Putin would “take 100 percent” of any of the largest companies. “The reality is a far cry from the hysteria we have today," he says. "Investors are pricing in the end of the world.”

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