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Lately, the Greek stock market has received a lot of attention and has achieved a 29% YTD performance. Behind the enthusiasm is the replacement of a populist government with a government mostly formed by technocrats under Kyriakos Mitsotakis, considered the most business-friendly Greek prime minister in decades. I had written about this prospect in my 2016 Seeking Alpha article, “GREK Equals Greek Politics”:
For the moment, we have two important and hopeful elements towards this process. First, in January, a true pro-reform supporter, Kyriakos Mitsotakis, was surprisingly elected as the leader of the main opposition party, New Democracy. Second, there is an increasing frustration in public opinion about present decisions. What remains is dissatisfaction to be expressed…
After all, the government shift has brought expectations and optimism that a lot of reforms could go forward, bringing hopes for an investment spree and rapid growth for the suppressed Greek economy. Investors with limited knowledge about specific stocks think that an ETF like GREK is the best way to take advantage of this potential recovery. I might disappoint them, but I do not find it a good proposition.
As a value investor, I am not a believer in the market efficiency hypothesis. Especially for smaller and “under-analyzed” markets like Greece, I have a stronger belief in this. My thinking is that, by carefully choosing undervalued stocks, an investor can achieve much greater results. For Greece, until now, those stocks were found in small cap space. For you to have a better idea, I will spend a few lines to show you what my portfolio has achieved compared to GREK and how I managed this outperformance. Later, I will present GREK’s largest holdings and my opinion on them, and in the end, I will showcase a few individual stocks as better alternatives.
Portfolio vs. GREK
I have invested in the Greek stock market for the past 20 years. Since GFC, when I started tracking my Greek portfolio, it has appreciated 152% (since 27/10/2008), while the Athens Stock Exchange Index has tumbled -56% for the same period. GREK, little after its inception (since 16/12/2011), has produced -32% in USD, while my portfolio has increased its USD value 177% (224% in EUR) over the same period.
The process for calculating the performance of my portfolio is as follows: At the starting date, I divide the whole portfolio to units of €1. For withdrawals, I cancel the corresponding amount of units, according to the value per unit at the time of withdrawal. For new deposits, I issue the corresponding amount of units, according to the value per unit at the time of deposit. The value of a unit is more representative for calculating the performance, since I made some withdrawals and deposits. Since 27/10/2008, value per unit has grown from €1 to €2.52, a performance of +152%. The portfolio has reduced its units 28% since 2008. The performance is +138% if calculated based on starting value of the portfolio and ending value, plus net withdrawals.
The outstanding outperformance results from a combination of (1) selecting and recycling extremely undervalued stocks, (2) balancing cash-stock position, and (3) the strategic decision of avoiding banks.
1. Some examples of my ideas that turned into multi-baggers have been detailed in my Greek blog (see: Galaxidi, Perseus). Of course, I had failures as well, with FF (OTCPK:FLLIY), the most epic of all. After the notorious accounting scandal, shares have been suspended and are probably totally worthless now. (A full description of the history of my all transactions and picks is in this 2017 report and the rules of the portfolio here, which, unfortunately, are in Greek)
2. The graph below shows that for periods that I was feeling that the valuations were not very interesting, I accumulated cash. At the same time, when valuations became super cheap, I could go “all-in.”
3. From very early on (2008), I was publicly presenting my negative opinion of Greek banks – this at a time when most Greek investors loved them as safe and durable stocks. I knew that Greek government bonds were a large portion of their assets. Just sovereign bonds were enough to wipe out equity, not to mention mortgages and business loans.
My opinion today of GREK
Here, you can find all my past articles on GREK. In all of them, I expressed my negative opinion of the ETF. At that time, a lot of Greek small caps had very interesting valuations, and some of them were still great bargains. Today, the problem is that most small caps have gone to valuations and multiples that, in many cases, match or exceed those of 2007. Nothing comes up as a bargain anymore, even by utilizing my network of few passionate small and efficient Greek value investors, who used to offer some great ideas in the past. We just cannot find the opportunities that can offer a 2-3x upside for an acceptable risk. So, later, I am just presenting some safer quality companies that are close to fair value, and some cheaper with higher upside, but riskier.
If I am not happy with the valuations outside GREK, you can guess how negative I may be about GREK itself. A misconception that makes global investors think that the Greek market is very cheap is that they think it is close to its lows. However, index “lies,” as I extensively explained in this 2013 SA article:
So, now bank stock prices are still low, but their capitalization is large, comparable to their equity, because of the large number of issued shares. Namely, we have a lot of capitalization added without index earnings. Any Greek investor can feel that. We have an index at around 1150 points, but large and mid cap stocks seem to be at the 3000 point level.
Index says the truth about what the average investor has lost in Greece. However, it lies about the level of prices. Unfortunately, many global investors automatically conclude that those low levels are an indication that prices are still cheap. I can assure you that their belief is wrong and that the multiples are the highest since 2007. You may realize it by watching the largest holdings of GREK below.
The X-ray of GREK
Legend: (% of Net Assets) Holding
(24.7%) Greek Banks: The big four – Eurobank (OTCPK:EGFEY), Alpha (OTCPK:ALBKY), Piraeus (OTCPK:BPIRY), and National Bank (OTCPK:NBGGY) – collectively make up about ¼ of GREK’s holdings. I would say that this is the most risky, but equally the most interesting part of the fund. I am not very enthusiastic about its risk-reward, but those are basically the stocks that can bring a substantial return and make a difference for the ETF. Banks are highly leveraged businesses, so in case of a fast recovery, the upside is big, since they still trade at low price to book multiples. On the other hand, most of their equity is deferred tax, and if new provisions and a need for capital raises come along, the stocks might lose all their value.
With a similar size, each of the four have total assets of about €60 billion. If I had to choose, I would pick Eurobank, then Alpha Bank. Eurobank, 33% owned by Prem Watsa’s Fairfax (OTCPK:FRFHF), stands out as the one having a private sector culture, while Alpha is considered to be the most conservative and thus safest. Eurobank’s equity is €5.08 billion, and earnings before impairments and provisions are close to €0.8 billion, when market capitalization is just €2.37 billion. However, most of the equity is attributed to the huge deferred tax of €4.92 billion, and any earnings are currently wiped out because of those exceptional items. This is indeed an aggressive part of the portfolio that can bring a lot of performance, but I consider it very risky.
(13.4%) OTE (OTCPK:HLTOY): The single largest position in GREK is Hellenic Telecommunication Organization. In 2018, OTE had revenue of €3.8 billion, a 5-year average net margin of 4.1% and a 5-year FCF margin of 6.2%. A rough estimation is that this non-growth company is capable of producing earnings of €150-200 million per year in the future. The current capitalization is €5.71 billion at €11.90 per share, and current P/E above 30x, which is crazy for a non-growth company. BT group, which is a similar story in the UK with better profit margins, trades at a P/E of 7.5x at £1.64 per share. Some Greek investors used to commend OTE for its great free cash flows. In this Greek article about OTE, I explain how we must use our judgment to evaluate cash flows.
(9.7%) OPAP (OTCPK:GOFPY): In 2018, Greece’s largest gaming company’s revenue was €1.04 billion, and its net income was €143 million. The market capitalization is €3.0 billion with the stock at €9.31, bringing P/E to 20.9x. I find the valuation expensive for a company that has little room for growth and may face harsh competition from the internet and new domestic entrants. Many investors like OPAP’s rich dividends; however, the problem is that OPAP distributes cash to shareholders beyond its earning power, leading to debt accumulation (see more in this article).
(7.6%) Jumbo (OTCPK:JUMSF): In the past, I have been wrong by being negative about this stock. Its valuation multiples were very high compared to other Greek stocks, and I was very skeptical about its ability to keep its enormous margins in the face of coming e-commerce advances. Moreover, I was finding its expansion in Romania and Bulgaria a challenge. But Jumbo’s Chairman Vakakis, thought to be one of the best businessmen in Greece, and the good management made the difference. Sometimes, very good management that can achieve and retain high margins and growth can be game-changing for the value of a company.
At times, I was critical of the extreme valuation multiples. This stock generally did not outperform my undervalued picks, if the period was just a few years. However, in the very long run, those quality companies tend to multiply their value. So, if the holding period is 10 years, positive results are achievable even by paying a higher multiple. I still worry about the disruption that e-commerce may bring, so I am not a fan of the stock, but I would not say that I am very negative either. On a comparative basis, Jumbo is not as expensive as it used to be, since the Greek stock market is becoming more and more expensive as a whole.
In FY 2018, ending June 30, revenue came in at €753 million and net income at €151 million, bringing P/E at 13.5x.
(5%, 7%) Gaslog Ltd (GLOG) & Gaslog Partners LP (GLOP): Those entities, trading on the New York Exchange, own and operate LNG carriers. Their capital structure is very complex, which is something I always dislike and avoid. During the previous few years, they produced marginal results, but the belief is that they are great prospects in LNG. I am not very familiar with the sector; thus, I avoid making further analysis.
(4.5%) Mytilineos (OTCPK:MYTHF): The company owns Aluminium of Greece, the largest aluminium and alumina producer in the EU, and also operates in EPC, electric power and gas trading. I used to like the stock back in 2016, but when the price was much lower at around €4 per share. (Mytilineos article)
Today, I would not buy the stock. P/E is still low at around 10x; however, aluminium is very cyclical and during 2017-2018, conditions were very favourable. During 2019, aluminium prices have slipped lower, and this is not a good omen for Mytilineos, which produces about two-thirds of its profits from metallurgy. In case of a global recession, things would take a turn for the worse for this company.
The companies presented above make up about two-thirds of GREK’s portfolio. Most of them have no significant upside potential. Banks and Gaslog could bring big returns, but with high risk. Equally, in case of a global recession, leveraged banks, LNG carrier Gaslog, and cyclical Mytilineos would be badly hit. Jumbo, OTE, and OPAP are defensive as businesses, but especially, the last two are very overvalued as stocks. With less enthusiasm, they would have to plummet more than 50% to reach a P/E of less than 10x.
We are left with two categories of stocks with meaningful prices for value investors. The turnarounds, such as banks and construction-related companies – which are still cheap but very dangerous – and some quality profitable businesses at so-so prices. I am not very pleased with their valuations, but they are far better options than buying the expensive OTE, OPAP, or Mytilineos.
Some Alternatives to GREK
Thrace Plastics
The company has a strong global presence, with 83% of its sales abroad. In 2018, revenue was €323 million, and as a low-margin business, net income came in at €8.0 million. The results were temporarily affected by the process of upgrading manufacturing capacity and the lag effect of rising input prices. In 2016, a good year for Thrace Plastics, net income reached €13.7 million. Even with current lower earnings, P/E is still very low at 9.1x. The market capitalization is just €91 million at €2.08 per share.
Karatzis
The company is well-diversified, operating in three segments: industry, hospitality, and energy. In 2018, net income was €7.5 million. With the stock at €7.85 per share, market capitalization is €115 million and P/E comes in at 15.4x. The multiple is misleading because current earnings are negatively affected by the opening of a new hotel that is expected to nearly double the revenue and net income of the segment in the long term. The company has a history of constant growth and has managed to almost double its book value during the previous 10 years, while it has low net debt to equity. It is interesting that such a company trades under its book value of €133 million.
Flexopack
Since 2014, this manufacturer of flexible packaging materials has grown its revenue from €58 million to €84 million and its net income from €3.7 million to €7.1 million. At €7.35 per share, the company has a capitalization of €86 million and trades with a P/E of 12x.
The valuations of the above three companies are not extremely cheap, as they used to be a few years ago; however, they are cheaper than the stocks included in GREK. They are profitable and growing firms, so time works in favour of the very long-term investor. It is true that I do not expect any tremendous performance, but I prefer them compared to cash.
Some Very Aggressive Stocks
For higher upside potential, accompanied by higher risk, interesting stocks beyond Eurobank (included in GREK) are Intracom, Elastron, the tiny but high growth Entersoft, and the heavily indebted Frigoglass (OTCPK:FRGGY).
Cypriot Stocks
Greeks have easy access to them as Athens and Cyprus Stock Exchange have launched a common platform. Cypriot stocks are extremely illiquid, and some of them have very low valuations.
Summary
The new business-friendly government in Greece is a good development, bringing hope for a rapid economic recovery. However, it seems that GREK is not the best way for an investor to take advantage of it. I still believe that carefully selected picks can do better, and I am confident about this belief, having seen the outperformance of my portfolio compared to GREK since its inception. In USD, my portfolio’s cumulative performance for the period is +177% versus -32% for GREK.
GREK’s X-ray reveals its major holdings are expensive and have no significant upside potential, except for some high-risk turnarounds like banks. Global investors miss that the index and GREK, being close to their lows, “lie” about valuations, which are the highest since 2007. On the contrary, some other alternatives such as Thrace Plastics, Karatzis, and Flexopack have better valuations and risk-reward profiles. They are not super cheap, but they promise better returns than GREK, in my view. An interesting option also is a few undervalued Cypriot stocks.
Author’s note:
Lately, I have a weakness for the extremely cheap UK stock market. I find some of the companies to be great bargains, so stay tuned as I will be revealing them here in Seeking Alpha. Do not forget to follow me and share my articles if you find them useful.
Disclosure: I am/we are long EGFEY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have positions in Karatzis, Thrace Plastics, Flexopack, Intracom, Elastron, Eurobank, Entersoft, Frigoglass
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