Russia ETFs Hold Some Really Inexpensive Stock

Yes, investors have heard this before: Russian stocks are inexpensive. Then again, that is usually the case, at least when Russian equities are measured against broader emerging markets benchmarks.

Against the backdrop of slowing economic growth, a sovereign credit rating that was recently lowered by Standard & Poor’s to BBB-, the lowest investment grade, and the invasion of Ukraine, Russian stocks are currently extremely discounted even by historical standards. The P/E ratio on Russia’s benchmark Micex Index is about half that of the MSCI Emerging Markets Index. [Russia ETFs Tumble After S&P Downgrade]

Those discounts are reflected in some of the marquee holdings of Russia exchange traded funds, including the largest, the Market Vectors Russia ETF (NYSEArca: RSX).

At the Sohn Investment Conference last week, Jim Grant, founder, Grant’s Interest Rate Observer, called OAO Gazprom, one of Russia’s state-run energy giants, cheap. As Adam Johnson for Bloomberg reports, Grant highlighted the fact that Gazprom is a prodigious generator of free cash, supporting a dividend yield of 5%.

Gazprom trades 2.5 times earnings, or 59% discount to its 10-year average, according to Bloomberg. The stock is RSX’s largest holding at a weight of 8.8%.

Another Russian energy giant trading at a deep discount to historical averages is Lukoil. It trades at four times, a 38% discount to its 10-year average, according to Bloomberg. That makes telecom name Mobile Telesystems look almost expensive. Still, that stock is trading at a 23% discount to its 10-year average, Bloomberg notes.

Plus, Mobile Telesystems, like Gazprom, generates impressive free cash flow and lobs off an enticing dividend. Last month, J.P. Morgan forecast a 2014 dividend yield of 8.2% on Mobile Telesystems American depositary receipts. By comparison, shares of AT&T (NYSE: T) currently yield 5.2%.