What if I told you that with the S&P 500 at an all-time high, you could buy one of the 5 most important companies in the world for 2 times earnings? The same company has very low leverage and a dividend yield well in excess of 7%. These are real opportunities that we are finding in one of the most reviled and intimidating countries in the world right now. Clearly, bargains like this do not come without having hair on them. Let’s discuss a few and then below I’ll provide my responses:
Sanctions have disrupted the Russian economy and dramatically reduced access to foreign capital.
The sanctions combined with the decline in oil prices should crimple the Russian economy to the extent that Putin becomes slightly more manageable or else the country could crumble from within, as it has before. The economy can put the pressure on Putin that NATO and the United States have not been able to do thus far.
Oil prices have plummeted and energy is the lynchpin of the Russian economy, prompting a highly likely recession in 2015.
I believe oil prices will go higher within the next 2-3 years as supply eventually contracts. I think it will take longer than most believe for drillers’ to dramatically reduce CAPEX and there will be bankruptcies, but higher energy prices over the long-term seems highly likely.
Vladimir Putin is waging a war in Ukraine and making overtures to other areas of the former Iron Curtain.
Putin has likened the Crimea to Jerusalem as having an almost religious significance to Russia. That is not likely to be going back to Ukraine, but it also provides the symbolic victory to allow Putin to slow down on additional aggressions.
Putin has been known to nationalize important companies offering investors little or no compensation.
Nationalization is definitely a risk with investing in Russia, but right now Russia needs access to capital more than ever and a new nationalization would be more difficult than ever to pull off without disastrous consequences. Putin already has de-facto control over the companies that we are interested in; so there isn’t much to gain through a nationalization, unlike in the past when he has done so to hurt his enemies.
World War 3 is not impossible to imagine with the geopolitical situation being what it is.
If World War 3 occurs soon, these investments will be the least of our concerns.
Now these are substantial risks and I don’t take investing in Russia lightly. First of all, we must realize that over the short-term there will be immense volatility. 10%-30% declines are quite possible, as we have no ability to pick the bottoms or time the market. Our only chance at investing successfully is to take a long-term perspective. Can the situation in Russia and the companies that we are involved with get better within 3-5 years? We must not take the large position sizing that we are willing to do as a more concentrated portfolio manager, as we can’t trust management like we can in some of our other investments. We need to focus on the most important companies with the best prospects and then also be willing to diversify our exposure through utilization of things like ETF’s, so as to reduce our reliance on any one company, because nationalization is not impossible in Russia or anywhere else for that matter. Look at Fannie Mae, Freddie Mac and what happened to GM bondholders in the United States.
The logical question is, what is the opportunity? I see several opportunities where I believe a 300-500% return is a realistic outcome over a 5 year period. These are the types of risk-reward opportunities that you dream of, but the requirement to be successful is a strong stomach. It’s always darkest before the dawn and we are sure to look stupid at times. The news will for the most part be bad. I don’t see a George Washington taking control of Russia and being willing to give up office after his tenure and setting the country on a democratic path.
Most money managers will not follow us into an opportunity like this, because they don’t want to be fired for looking stupid. When we started T&T Capital Management, we did so with the assurance that we would only work in our clients’ best interests. Well, if doing so involves me looking stupid over the short-term that is fine, as we are built for the long-term and will honor our pledge to only act in our clients’ best interests. We put out more content than any firm I’m aware of, especially given our size, and the reason we do so is to educate clients so that they know the reasoning behind the decisions we make. Distressed investing is what we do best and we have a track record of doing so in various industries such as telecom, financials, healthcare, technology etc. Just two years ago we made a ton of money on European telecoms and PC companies that many had given up for dead due to a miserable economic, political and regulatory environment. I can assure you that I’ll be investing my own money and my family’s money alongside, because I believe the opportunity is that attractive for those with a long-term mindset. Even if these investments don’t work out as well as I expect, I still believe we will do great because of our larger positions, but I thought I’d finally shed some light on this long-term opportunity, which we’ve been establishing positions in.