Russia: Get Rich Without Rock-Hunting

by Aaron Levitt | February 22, 2013 7:00 am

Last week, while the 2012 DA14 meteor silently glided past the earth, a meteor crashed into Russia — the largest such object to hit the earth in more than a century. Upon impact, the 10,000-ton rock exploded and unleashed nearly 500 kilotons of energy. That’s roughly more than 30 times the energy of the Hiroshima atomic bomb.

Scientists have been able to recover smaller fragments of the stone, but larger ones remain elusive. That’s set off a “meteor rush[1]” in the nation.

Of course, Russia has much more to offer than bits of a historic rock. Russia — the red-headed step child of the BRIC nations — has been a less-than-ideal growth story. The nation has seen its fortunes wax and wane with energy prices, while it’s hard to forget its history of corruption. However, the investment climate in the former-Soviet state continues to improve and foreign direct investment is growing.

All in all, Russia is simply too big and too rich to ignore.

For investors, there means there are plenty of opportunities to go hunting in the nation for your portfolios, even if the picks are far from out-of-this-world meteors. Take a look:

Mobile TeleSystems

While much of the focus on the newly emerging middle class consumer[2] has been thrust towards China, Russia actually boasts the highest disposable income in the BRIC. This petro-dollar fueled extra household income is nearly 30% higher than Brazil’s, almost four times larger than China’s, and 10 times that of India’s. That’s a lot of extra rubles to spend on things like cell phones and apps … and that’s good news for Mobile TeleSystems (NYSE:MBT[3]).

With more than 100 million subscribers across the Russian Federation, Ukraine, Uzbekistan, Armenia and Belarus, MBT has been able tap into the region’s growing incomes and thirst for mobile technology. The company is the top provider in Russia, yet there’s still plenty of room for growth at the firm.

For one, many Russians actually own more than one cellular phone. Additionally, by partnering with telecom giant Vodafone (NYSE:VOD[4]), Mobile TeleSystems has unveiled a new “bundled service” strategy where it will not only offer mobile and fixed telephony, but high-speed Internet access as well as movies and cable TV.

Shares of MBT gained around 25% in 2012 and shareholders could be in for more gains as the petro-fueled economy moves forward.

LUKOIL

Speaking of those petro-dollars, much of the Russian economy is tied to the energy industry. The nation features some of the largest reserves on the plant and is set to be one of the world’s largest suppliers of oil and natural gas for years to come. We’ve recently highlighted the opportunity[5] in state-owned Rosneft (PINK:RNFTF[6]), but another lies in often-overlooked energy producer LUKOIL (PINK:LUKOY[7]).

Responsible for roughly 17% of all Russian oil production and 18% of Russian oil refining capacity, integrated energy firm LUKOIL is just as big as many of its Russian state-owned rivals … yet the firm continues to trade at big discounts to other integrated majors like Exxon (NYSE:XOM[8]) or BP (NYSE:BP[9]).

Much of that discount can be attributed to the fact that it’s simply located in Russia[10]. However, LUKOIL is the only Russian oil company whose share capital is dominated by minority stakeholders and not government.

For a P/E of just over 5, investors are able to gain access to some of the largest hydrocarbon reserves owned by energy firm to date as well a nice 4.7% dividend yield based on last year’s payouts.

Mechel

Aside from the vast hydrocarbon wealth, Russia has been blessed with a bounty of other natural resources including coal, zinc and timber. With the global economy beginning to grind forward, any demand growth should help shareholders in suffering miner and steel[11] producer Mechel (NYSE:MTL[12]).

The firm — which sells metallurgical and steam coal, iron ore, finished steel products, nickel and zinc — has fallen hard as global coal prices continue to drop[13]. Mechel actually shuttered some of its some U.S.-based coal mines due to risen supplies and falling costs. However, based on its last earnings report, things are looking up for the firm.

Mechel posted consolidated net income of $55 million in the third quarter of 2012 compared with a net income of $26 million a year ago — over a 100% increase. With the firm focusing on cost measures and its leadership position in steel production, analysts expect additional improvements to the firm’s earnings. Price targets for Mechel shares are roughly 25% higher than it currently can be had for.

Sberbank

If you’re not spending those commodity-based dollars, you’re investing or saving them.

As the largest bank in Russia, Sberbank (PINK:SBRCY[14]) has nearly 20,000 branches across the Russian Federation and dominates in terms of deposits and loans. The bank accounts for roughly one-third of all aggregate banking assets in the nation and more than 70% of the entire Russian population uses the bank.

That scope and size has helped Sberbank post some pretty impressive earnings growth over the last few years.  Full-year profit for 2012 rose 11% as the bank made more loans to consumers and companies. More importantly, non-performing loans continue to drop and the financial[15] giant’s net interest income jumped 23% during the year. Net interest income is an important bank statistic as it measures the difference between what a bank earns from lending and what it pays on deposits.

Despite being the fourth largest bank in all of Europe, Sberbank is most ignored by investors. That’s a shame, as it remains one of the best opportunities to play Russia’s rising wealth.

Market Vectors Russia ETF

If you can’t decide on one stock, you could also try the Market Vectors Russia ETF (NYSE:RSX[16]). It’s far from being as exciting as a meteor, but it’s a solid, broad choice. It features the most assets ($2.7 billion) compared to its exchange-traded fund[17] competitors and it has the heaviest trading volume.

The ETF counts all firms on this list as top ten holdings, as well as other Russian heavy-hitters like Gazprom (PINK:OGZPY[18]). However, like much of the Russian economy, RSX is heavily weighted in energy and basic materials — at 43% and 20%, respectively. That could be a short-term issue if commodity prices take a real dive.

Still, longer-term, rising global demand — especially from its neighbor China[19] — will help continue to push the Russian economy forward. For investors, owning the broad ETF could be one of the best ways to participate in the nation’s growth. Plus, expenses run cheap 0.62%.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/02/russia-get-rich-without-rock-hunting/

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