Sven Lorenz, chief executive of Swiss fund management firm ARBB, chooses three contrarian stock tips from around the world.
Last week, several of the investment publications I read regularly started to recommend stocking food, water – even ammunition. Is another Great Depression heading our way? Should we prepare for the end of the world as we know it? Not at all. I take the current doom and gloom as a sign that we are somewhere near the market bottom. In fact, such moments of panic usually turn out to be among the best buying opportunities.
In the spirit of buying what no one else dares to buy just yet, I have picked three investments that most investors wouldn’t touch with a ten-foot barge pole. These are high-profile fallen titans, with share prices down by 70% to 80%. Their sectors are the focus of the current panic, and their names will send a shudder down the spines of many an investor. But now could well be the time to swim against the tide.
Taking a more balanced, longer-term view, these three investments offer the kind of opportunity that in years to come could multiply your money many times over. Needless to say, the fact that no one currently believes any of this is a key part of the equation. Large gains usually only come from shares that your friends, your banker and your wife or husband warn you against.
Gazprom (OGZD): time for a rethink?
Let’s start with the most fearsome of all. Gazprom is known both for being located in an investment hell, and for its entanglement in the politics of one of the world’s most corrupt nations. The firm embodies every good and bad aspect of Russia. It’s very much an integral part of the all-powerful Russian government – the state remains its largest shareholder. It sits atop one of the world’s largest natural gas reserves, making it a symbol of Russia’s energy supremacy.
Last but not least, it has experienced a huge fall in value. Like the rest of the Russian stockmarket, Gazprom shares have been battered down to prices last seen before the commodity bull run began. The turmoil in the Russian market has been so bad that the government has shut down trading on several occasions. The market decline has been almost as steep as in 1998, when the country declared itself bankrupt.
But are things really that bad? Russia isn’t the same country that it was in the late 1990s. For a start, it now has $800bn in foreign reserves. Falling stock prices are hurting its oligarchs, making for great newspaper stories about billionaires with shrinking fortunes. But the wider population is debt-free (mortgages and credit cards were only introduced recently) and the country’s sketchy property laws are improving every year. Russia won’t declare itself bankrupt again, nor will the government allow another Yukos debacle to happen.
So assuming that Russia isn’t going to disappear off the map, what’s the potential upside? For Gazprom, it’s huge. Even before the collapse, Gazprom shares offered one of the world’s cheapest ways to buy into proven energy reserves. After the 80% share price fall, this is the cheapest major natural gas company on earth. There are concerns about the recession hitting gas demand and Gazprom also has to overcome some hurdles to finance its investment programme. But all of these concerns should by now be in the share price – at a price/earnings ratio of four, the vast gas reserves beneath Siberia’s tundra are being given away at firesale prices.
And in case you need to explain to your spouse what you just bought for your private pension account, just mention the recent cold spell. Europe needs to heat its homes and no other company provides more gas to the EU than Gazprom. So holding a few Gazprom shares is a great hedge against rising heating bills.
Don’t write off UBS (UBSN)
No other European bank has taken bigger write-offs over the US subprime crisis than UBS. Once known as the world’s biggest wealth management company, UBS has recently made headlines for writing off CHF50bn, forcing the national government to rush in to provide financial support. Worse still, the bank’s plight has highlighted the fact that Switzerland is at extreme risk if the entire financial system does go into complete meltdown. UBS and Credit Suisse alone have more outstanding loans (CHF640bn), than the country’s entire GDP (CHF512bn). And the combined balance sheets of the two banks (CHF3,200bn) represent more than six times the size of Switzerland’s GDP. Rudimentary as these figures are, they show that a systemic crash could put Switzerland into serious trouble.
Yet the fact that people are taking such stories seriously goes to show just how pessimistic markets are. The same holds true for UBS. The bank has lost about 80% of its market value in the past 18 months, yet it still has CHF2,000bn in client assets under management. Recent withdrawals came to CHF85bn – painful, but a drop in the bucket compared to UBS’s overall size.
What few people notice is the stickiness of most of the assets managed by UBS. Those who seriously feared for the safety of their bank deposits have already withdrawn their money. For a while, there were noticeable queues in Switzerland’s UBS branches. However, those days are long gone and it’s already becoming apparent that only a comparatively small number of clients are shifting assets to other banks. The Swiss government guarantee helped calm things down.
Will UBS survive the current crisis? Not only is that a very likely bet, it’s also highly likely that the UBS brand will rise from the ashes. Yes, the company made bad bets in the debt market. Yes, some of that also had ill effects on client accounts and investment products. But when you think of offshore wealth management, UBS is still the first name that comes to mind. Such a well-established brand doesn’t die because of a single crisis. UBS will reinvent itself, and the share price will leave its current lows behind.
Toll Brothers (TOL) could rise again
What other area wouldn’t investors currently dare to touch? It has to be American property, or – worse still – US real-estate developers. These are essentially property investments on steroids. Developers make heaps of money in booms, then come crashing down to earth in downturns.
One of the biggest, brightest stars of the latest housing boom was Toll Brothers. The group had a reputation for building large, high-end suburban homes with all the latest must-have appliances. In the era of cheap credit, these were the homes that upmarket Americans lusted for, and for which banks happily handed out excessive mortgages. Between 2000 and 2005, the share price rose more than tenfold.
Today, the share price is 70% off its previous high. Toll Brothers had to write down $1.5bn on land reserves. For developers, land is the raw material they have to work with. But before raw land can be sold as expensive lots, developers must push through approvals, build roads, fight off litigious neighbours and prepare the construction of houses.Such multi-year projects are hard to time, which is why property developers often end up holding expensive tracts of land when the industry enters a downturn. Hence the write-downs on Toll Brother’s land reserves. Also, some parts of the land portfolio had to be sold off. Yet even given that, the company still controls an acreage about the size of Boston.
These write-downs were scary news for investors who bought in at the top. But for everyone else, it’s the firm’s future that’s interesting, not its past. Market psychology aside, is there a case for Toll Brothers potentially being able to profit from the current crisis? The company now has one of the industry’s lowest debt loads, and one of its largest cash reserves. The $1.5bn sitting in the Toll Brothers’ bank account will come in handy if they were to buy distressed assets from smaller rivals. Buying land on the cheap would be the crucial move for them to make during such a period. Toll Brothers has lived through four previous such crises, and the company (still led by its founder, Bob Toll) should rise to new heights again when the next boom comes.
When is this next boom likely to appear? With the Presidential elections coming up, there’ll be no shortage of media coverage about how the US is supposed to have lost its position as the world economy’s steam locomotive. But what’s often forgotten is that America is still the only country that manages to attract five to ten million immigrants a year – many of them the best and brightest, keen on improving their life. Buying a house is part of their dream, and Toll Brothers is amongst those providing it. Or, as JP Morgan once put it: “In the long run, betting against America has always been wrong”.
The big money is made now
Calling the exact bottom is a tricky, if not impossible business. Yet, if you are buying a share that everyone warns you not to buy, you can be reasonably sure your investment will be a long-term success. Bet on large companies with strong assets – be that cash, gas sitting in the ground, or a brand. Take positions small enough to allow you to double up if the price does fall further (a distinct possibility, now that even the FTSE 100 fluctuates as wildly as a penny stock). Plan to hold these investments for two to three years, and don’t get upset about wild swings. Chances are, this pile of allegedly toxic companies will eventually turn out to have been a honeypot of opportunities. Provided, of course, you can look beyond the current panic.
• Sven Lorenz is an analyst and fund manager. You can read his investment blog at www.undervalued-shares.com.