Iceland: A "Hot" Market?

03/24/2006 12:00 am EST

Focus:

It is unusual to find advisory commentary on Iceland. It is rare indeed to see three leading gurusNeil George, Jon Markman, and Steve Sjuggerudeach look at opportunities in this relatively obscure market. From a bank to a smelter to a CD, here are their reviews.

(For more on the advisors cited below, please click on their photos.)

George, NeilNeil George, in his By George! e-letter, explains, "Iceland is blessed with copious amounts of natural springs of boiling hot water that are harnessed to provide cheap energy. In addition, the mountainous terrain of the nation also provides ideal settings for hydro-powered electricity. In a world that's power poor and searching for the nirvana of fossil fuel-free energy, Iceland is the only economy that truly has a shot at being the first near fossil fuel-free economy in the world.

"Setting the stage for investment flows is the government, which has been deregulating the capital markets aggressively while reforming and tightening fiscal and monetary policies that credit rating agencies and global investors are lauding, giving Iceland an overall AAA credit rating. The local stock market, bond market, and currency recently slippedmore accurately, crashed due to a Fitch Ratings Agency report that downgraded its outlook to negative.

"The reason: Given the massive flows of new capital goods into the nation on top of cash flows from dividends and bond payments to a bigger chunk of foreign investors, the current account has shifted into the red. But I believe that investors should give this market consideration. After all, despite the recent decline, Iceland's stock market has trounced the performance of the S&P by 19 times during the past four years.

"The local market is tough to buy, but there are some bigger issues that trade in the US over-the-counter market, such as our favorite bank Kaupthing (KPBIF Other OTC). This stock has been soft on the news and should be a key beneficiary from the rebound we expect as investors and traders that follow this market step in to grab some additional investments at bargain prices. Kaupthing isn't just a leader in the local market but a well-run investment bank with other positive dealings in the US and continental Europe.

"We know this isn't an easy stock to buy. But you can buy it from many of the biggie brokers. Another alternative is to go to the bank directly, which has US offices in New York that deal with local Iceland shares, bonds, and most local European stock markets. Meanwhile, buy Kaupthing up to $15."

Markman, Jon "Turning aluminum into soda cans, airplanes, pickup trucks, and hamburger wrappers requires an unbelievable amount of power," notes Jon Markman, in Daily Advantage. "I have found an unlikely winner in the aluminum game Century Aluminum (CENX NASDAQ). "A couple of years ago, the California company contracted to obtain ownership of a big smelter in Iceland. This island nation makes for great smelting. Its volcanic heritage provides a vast supply of super-cheap geothermal energy.

"Century expects to complete a project to double the size of its Icelandic smelter, called Nordural, in the next six months, and plans to build another one by 2010. Century has entered into a very economical 13-year deal with Icelandic power suppliers for the electricity and has pre-sold all of its capacity in a long-term deal to two customers Glencore and BHP Billiton.

"Valuation of a commodity producer can be tricky, but just to make it simple consider that Century will probably earn around $3.90 per share in 2006, or a little better than 40% more than in 2005, and as much as $5.00 in 2007. At the current share price of $30, it means its forward p/e multiple on 2006 estimates is around 7.2. Century's average P/E multiple in the past has been around 15, so if the market comes to value it closer to its prior levels, the shares could be knocking on $45 to $60 over the next 18 months. In my view Century shares are looking rather shiny."

Sjuggerud, Steve"In the last six years or so, I've traveled to Iceland many times and I believe it may be the safest country in the world in which to do business," adds Steve Sjuggerud, editor of the Daily Wealth e-letter and the monthly newsletter, True Wealth. "In other safe countries, interest rates are generally low. In Iceland, a three-month CD is yielding about 8%. Why are rates so high? The answer is actually pretty simple: In 1983, inflation in this country reached over 100% and the government has committed itself to never allowing that to occur again.

"So whenever inflation approaches 4%, the Central Bank slams on the brakes, and starts raising interest rates. For most of 2003 and part of 2004, the Central Bank had set interest rates at 5.3%. But now, like in the States, a housing boom set in and analysts were predicting inflation of 5% in Iceland in 2006. So to prevent that from happening, the Central Bank is keeping rates extremely high.

"This situation presents a great investment opportunity for us: high interest returns with extremely low risk. When you buy a three-month Icelandic Krona CD, you agree to deposit your money in a Krona-denominated bank account for three months. At the end of that period, the CD expires and you get your money back, plus interest. If you prefer to keep your money in Krona, simply roll the CD over for another three-month period.

"The risk lies in the exchange rate. If the Icelandic Krona should fall against the dollar while you own the CD, your principal will decline in the same proportion. Of course, if the Krona gains by 3%, your principal also increases by 3%. Whatever happens to the exchange rates, you still receive the interest no matter what. But the most important thing to remember is money will be attracted to Iceland as a direct result of the high interest rates found there, and that should support the currency.

"Up until now, collecting these high, safe returns wasn’t possible without buying direct in Iceland. The good news is that Everbank has introduced the Icelandic Krona CD to its product line, with a yearly rate of 8.24%. I think this CD is a great place for your safe money. The minimum investment is $10,000. Everbank is a $3.6 billion company. I’ve personally sat down with Everbank CEO Frank Trotter and I think they’ve made a great move here, with a high paying CD in the world’s safest country."

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