A Buy Low Sell High Opportunity?

Russian stocks, as measured by the Market Vectors Russia ETF (NYSE: RSX), are down 15 percent year-to-date.  On Monday alone, when it looked like President Vladimir Putin had lost his marbles, the RSX dropped 10 percent.  On Tuesday, however, following Putin’s decision to not use force in Ukraine – for now – Russian stocks jumped 4 percent.

On Wednesday the RSX was flat and yesterday it was down about 1 percent.  Could this be a turning point for beaten down Muscovy stocks?  Naturally, we don’t know.  But we think it merits pause for consideration.

According to Jacob Nell of Morgan Stanley, “[Monday’s] sell-off has taken the market to technically extreme oversold levels.  Valuation multiples have only been cheaper in the depths of the 2008 crisis (when earnings fell about 60 percent).  And oil markets are stable in contrast to sell-offs in Russia historically.  Despite the obvious hit to growth expectations implied by the crisis, any sign that tensions are beginning to de-escalate would constitute a buying opportunity.”

For perspective, here’s how Russian stocks are priced in comparison with U.S. stocks.  The RSX is trading at a price to earnings ratio of 6.  In contrast, the S&P 500 costs 19.86 times earnings.  That’s more than triple the price for U.S. stocks than Russian stocks.  Does this price discount make Russian stocks a good buy?

Not necessarily.  A stock can be cheap because the business it represents is a bad investment.  Kodak, for example, is a dying business.  Most likely, it’ll never return to its former glory.

Profiting from Mean Reversion

Alternatively, a stock can be cheap because – for one reason or another – the public hates it.  Similarly, so can an entire country’s stock market.  The people may be hard working and upright.  But all it takes is a strongman in office, making a couple hot headed decisions, and before long the potential of an entire country is soiled.

Along these lines, if there was ever a country and by association an economy, that the investing public hates…it would have to be Russian stocks.  Only a madman, or someone with shrewd conviction, would put their hard earned money into such a thing, right?

Here at the Economic Prism we are captivated by stocks that are trading for what appears to be pennies on the dollar.  What is going on, we wonder?  Why are they so cheap?  Eventually they’ll revert back up to, and perhaps overshoot, their mean.

To the contrary, we are suspicious of stocks that have run-up to new highs.  Something about the fervor pushing stocks to the moon makes us apprehensive.  How much longer will it last?  So, too, eventually they must revert back down to, and perhaps past, their mean.

Incidentally, the current bull market turns 5-years old on Sunday.  On March 9, 2009, the S&P 500 bottomed out at close of 676.  Yesterday it closed at a new record high of 1,877.  Over the course of this bull market the S&P 500’s up 177 percent.  What are the odds it will jump another 177 percent over the next 5-years?

A Buy Low Sell High Opportunity?

We’ll venture a guess that the odds of this happening are slim to none.  In fact, the S&P 500 will likely suffer a significant drop at some point over the next 5-years.  Thus, if the goal to investing is to buy low and sell high, do you really want to by an S&P 500 that’s up 177 percent?

Or would you rather buy something else that’s at rock bottom prices?  Naturally, a good rock bottom bargain is preferable to an overpriced rip-off.  Still, are Russian stocks really something worth investing in?

That’s a matter of opinion and the willingness to take on gut churning price volatility.  Other emerging markets, like Brazil, offer attractive valuations without the Putin factor.  There’s always more than one show in town, for sure.  But today we’re contemplating Russian stocks…

Obviously, part of the discount accompanying Russian stocks is the political risks of Putin.  What stunt will he try next?  Moreover, how will this impact your investment in his country’s businesses?  But that’s not all to consider…

For what type of red blooded American hands his money over to Russian businessmen?  Is this the doing of a turncoat or traitor…or a blind opportunist?  These, of course, are questions for each individual to answer.  We are merely bringing this apparent market disparity to your attention.

Likewise, we’ll keep an eye on how this idea progresses for you.  That you can count on.

Sincerely,

MN Gordon
for Economic Prism

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