Taking Advantage of a Greek Tragedy

11/11/2011 11:30 am EST


It may seem lunacy to invest during turmoil, but history has shown a crisis can be a prime entry time, writes Simon Avery of The Globe and Mail.

Buying into Greek stocks today might be considered an act of insanity, but the Hellenic market could be priced to deliver huge gains down the road.

For precedent, look to Central and South American exchanges, which came out of the region’s financial crises of the 1980s, 1990s, and early 2000s to bestow spectacular gains on patient investors.

Consider that the world’s best-performing stock market over the past ten years has been Peru’s, with the Lima general index up almost 2,000%. Brazil’s main stock index is also ranked in the top five. And Venezuela’s stock market index boasts the top return for the past year—up almost 70%.

For courageous investors who are willing to distinguish between Greece’s government debt and local companies with durable assets and paying customers, there may be opportunities to buy for long-term gains.

Valuations of Greece’s biggest companies have been eviscerated since the financial crisis began almost three years ago. Shares of National Bank of Greece (Athens: ETE), for example, have lost 93% of their value in the past five years. Over just the past year, the Athens Stock Exchange has tumbled 45%.

Historically, things look even worse. The Greek stock market has the honor of being the worst-performing exchange over the past ten years, with the ASE losing 42% of its value during that period.

This rapid evaporation of wealth has left Greek stocks dirt cheap. The 39 companies whose shares comprise the ASE trade at an average price-to-book value multiple of 0.45, and at the same time boast an average 4% dividend yield.

Certainly, stocks of financial institutions remain an extremely dicey bet. Greeks reportedly withdrew nearly 3% of total deposits in two days this month, following former prime minister George Papandreou’s shock call for a referendum on a Eurozone bailout.

But many other Greek companies are almost certain to keep growing once the crisis stops buffeting their markets. Athens-based Coca-Cola Hellenic (CCH), for example, is the world’s No. 2 bottler of the popular soft drink, with operations in 28 countries.

The stock, which trades in both Athens and New York, goes for 16 times trailing earnings. That compares with more than 20 times for Coca-Cola Femsa (KOF), which distributes soft drinks in Latin America.

Ian Shackleton, an analyst with Nomura International PLC in London, cut his price target for Coca-Cola Hellenic by 20% this week, after sales and profit slipped in the third quarter. He rates the shares "neutral," but notes that the company is cutting costs and has locked in or hedged many of its material costs for next year.

"Although we detect deterioration in consumer confidence in key markets, we see company execution adapting to the challenging environment," he wrote in a research note published Wednesday.

Then there is Titan Cement (Athens: TITK), which commands as much as 45% of Greece’s market for the building material, and has expanded operations into 11 other countries. It would be hard for a company to face stiffer crosswinds than this company, with exposure not just to the domestic building industry, but also the US construction market as well as Egypt and Libya.

But analysts say Titan’s size positions it well to profit from an eventual economic recovery. Yiannis Sinapis, of Euroxx Securities SA in Athens, estimates that free cash flow will rise steadily, from €66.1 million ($91 million) this year to €156.9 million in 2013, while long-term debt should decline from €657 million this year to €457 million in 2013.

Similarly, Ellaktor (Athens: ELLAKTOR), Greece’s largest construction group, has diversified as a defensive move. Its renewable-energy and waste-management operations are both expanding, and it trades far below what Sinapis calculates as the fair value of its assets. He rates the shares "overweight" with a targeted 120% return over the next year.

Terna Energy (Athens: TENERGY), meanwhile, which specializes in wind farms, hydroelectric projects, and solar energy, could see a gain of more than 80% in the next 12 months, Sinapis tells clients. He forecasts annual sales growth of 23% over four years.

A Drachma of Hope
Greek equity investors worry that much of their holdings would get wiped out if the government replaced the euro with a new drachma currency. But this fear only tells half the story.

Certainly the currency would dive. But the switch would give Greece control of its monetary policy again, allowing it to devalue a grossly overvalued currency.

The change would benefit corporate earnings—and stock prices—in three ways. First, companies would regain easier access to capital, albeit in drachmas and not euros.

Second, Greece’s exports would become much cheaper to global buyers, boosting the financial performance of many local companies. Third, tourists would flock back to the country to take advantage of lower prices, providing a big boost to employment and currency reserves.

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