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%.
Gazprom, Lukoil and Mobile Telesystems combine for 21.3% of RSX’s weight, according to Market Vectors data.
Investors with a taste for adventure might want to know that it is not just Russian large-caps that are inexpensive.
Although it has tumbled nearly 11% since the end of February, the Market Vectors Russia Small-Cap ETF (NYSEArca: RSXJ) holds some attractively-priced names among its 31 constituents. RSXJ is inexpensive compared to RSX. The small-cap ETF had a trailing 12-month price-to-book ratio of just 0.34 at the end of March, less than half RSX’s price-to-book ratio. [Big Potential With Small-Cap Russia ETF]
By at least one estimate, RSXJ trades at just 2.2 times weighted average cash flow.
Market Vectors Russia ETF
