Should You Invest in the World’s Most Hated Stock Market?

by Nicholas Vardy
St_Petersburg_Russia

When I had dinner last fall with Bill Browder, founder and CEO of Russian markets investment fund Hermitage Capital Management, it was an unusual experience.

That's because Bill didn't touch his food or drink.

No, Bill isn't worried about his weight.

It's just that he doesn't eat food served to him in public places.

That's because for the past decade, Bill has led one of the highest-profile anti-corruption campaigns against the Russian government. (You can see a documentary on Bill's story here.)

Formerly the largest foreign investor in Russia, today Bill lives his life in the crosshairs of Vladimir Putin and the Russian agents bent on destroying his life.

Bill's abundant caution at our dinner wasn't just paranoia.

Since I last saw him, both a former KGB agent and his daughter were poisoned by Russian agents in London.

Investing in Russia in the 1990s made Bill Browder a very wealthy man.

I don't think many foreign investors are likely to repeat Bill's success anytime soon.

But I do think investing in Russia today offers some exceptional opportunities.

My reasoning is simple: Whenever investors absolutely hate a company, sector or asset class, you can often make a lot of money.

And it applies not only to Russia but to every successful investment I've ever made.

As Sir John Templeton famously put it...

People are always asking me where the outlook is good, but that's the wrong question... The right question is "Where is the outlook the most miserable?"

Whether it's due to the annexation of Crimea in 2014....

Interference in the 2016 presidential election...

Or Putin's support for the Syrian regime...

Russia's market is the most hated I've seen in my life.

The most recent sanctions against Russia announced on April 6 took their toll on the Russian stock market.

The RTS Index (Russia's equivalent of the Dow) slumped by 8.3% on that day, and the ruble lost more than 3%.

But here's the good news: This recent collapse of the Russian market offers a rare opportunity.

Russia is now so hated that if it ever turns around, savvy investors are going to make a lot of money.

Most investors, of course, don't invest this way.

Investing in a sexy biotech growth story is easy.

Investing in countries and companies everyone hates is hard.

This goes back to one of the most counterintuitive rules of investing - and one I learned from Bill: "You make more money when things go from truly awful to merely bad than when they go from good to great."

Investors hating Russia is nothing new.

After the market's meltdown in 1998, one investor famously declared, "I'd rather eat nuclear toxic waste than invest in Russian securities."

You too probably think Russia today is "truly awful."

I'm here to tell you that you can make a lot of money in Russia when it becomes "merely bad."

Let me explain...

Between 2014 and 2016, the Russian economy was walloped by a double whammy of tumbling oil prices and Western sanctions.

Then in 2017, a series of interest rate cuts spurred lending and the economy grew.

The World Bank expects Russia's economy to grow by 1.7% this year and 1.8% in 2019.

Ratings agency Standard & Poor's upgraded Russia's debt to investment-grade in February.

Finally, Russia is the second-cheapest market in the world on a long-term cyclically adjusted price-to-earnings (CAPE) basis (Greece is the cheapest).

Trading at a price-to-earnings ratio of about 7.7 and a price-to-book ratio of 0.9, the Russian market trades at half the level of the broader MSCI Emerging Markets Index.

So yes, investing in Russia should be approached with caution. The U.S. Treasury Department is tightening the noose around the necks of Putin-linked Russian oligarchs where it can.

In fact, many investors will be forced to sell certain Russian assets by May 7 as a result of the latest sanctions.

But once that date passes, I believe investors will pile into the $1.8 billion VanEck Vectors Russia ETF (NYSE: RSX).

Unlike Bill Browder, I wouldn't bet my career on Russian stocks.

But I know that my personal biggest wins have come from my willingness to bet against the market consensus.

Russia may be the most unpopular place in the world to invest...

But it may also turn out to be one of the most profitable.

Good investing,

Nicholas

P.S. If you're interested in the details of Bill Browder's remarkable story, I recommend you read Red Notice: A True Story of High Finance, Murder, and One Man's Fight for Justice. Bill told me he is in discussions with screenwriters to turn the book into a movie as well.

Thoughts on this article? Leave a comment below.

The Lucrative Business of Cyber Defense

By this point, it's undisputed that Russia interfered with the 2016 presidential election (although the extent and impact of that interference is still widely debated).

So if you really can't bring yourself to proactively support the Russian economy by investing in it, consider a more defensive stance. Alexander Green recommends cybersecurity provider Proofpoint (Nasdaq: PFPT) in The Oxford Communiqué's Ten-Baggers of Tomorrow Portfolio. Here's what he said about it last September...

The disturbing inevitability of cyberattacks becomes more apparent every day.

Brian Finch, co-chairman of the cybersecurity practice at Pillsbury Winthrop Shaw Pittman LLP, recently warned in The Wall Street Journal that "We are a few keystrokes away from a dystopian world with no lights, running water or modern communications."

As a result, companies are spending billions for cyber defense. And that's filling the coffers at Proofpoint (Nasdaq: PFPT), a member of our Ten-Baggers of Tomorrow Portfolio.

Based in Sunnyvale, California, Proofpoint is a leading next-generation cybersecurity firm, providing threat protection to more than 3,000 businesses and nonprofits worldwide.

These organizations count on Proofpoint to block spam and viruses, encrypt sensitive data, and securely archive email and other documents.

The company helps organizations keep malicious content out of their environments, prevent the theft of sensitive information, and communicate securely with customers and suppliers.

Staying ahead of hackers, criminals, terrorists and rogue nations is no easy task. Global cyberattacks now number in the hundreds of millions a day.

However, Proofpoint offers unparalleled, patented technology to meet all manner of online threats.

Proofpoint's solutions stop 99% of attachment-based attacks. Every day, it detects and blocks advanced threats and compliance risks in more than 600 million emails, more than 7 million mobile apps and hundreds of thousands of social media accounts.

That's why half the Fortune 100 and more than a third of the Fortune 1000 already use its services. Those include the world's top five banks, seven of the top 10 global retailers and 14 of the top 15 research universities.

Proofpoint is aggressively going after the rest.

The company is not yet profitable, but sales last year increased 37% year over year.

Plus, it will benefit from several factors: new Office 365 products, international expansion and a steady increase in business email attacks.

That's why management projects that annual sales - currently $515 million - will hit $1 billion within three years.

It's a tough but achievable goal. Cybersecurity is the No. 1 IT priority at most organizations - and a field that is virtually certain to maintain intense demand.

Proofpoint is up 59% since we first recommended it in September 2016. But expect strong sales, improving earnings and a higher share price in the weeks ahead.

- Donna DiVenuto-Ball with Alexander Green

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