The recent crisis in Ukraine has caused some short-term volatility and investor concern, but when there is panic there are always value investors looking for an opportunity. The idea is that panicked sellers offload valuable assets, driving their prices down, but these assets will inevitably recover in the long term because they have intrinsic and durable value. Think of the S&P 500 in early 2009; stocks fell to absurd lows on panics, and value investors like Warren Buffett were eager to buy stocks at scale.
A similar situation is brewing in Russia, where a number of local companies are seeing their values plummet amidst the political uncertainty over Crimea. The Market Vector Russia ETF (RSX) fell 25% year-to-date before recovering in the past week on easing tensions. Meanwhile, some Ukrainian stocks are hitting recent lows, such as Avangardco (LON:AVGR), which is down 24% for 2014.
This is a very obscure stock to most western investors, and many brokerages will not trade it. Liquidity issues aside, the metrics are impressive: with a current TTM P/E ratio of 2.37 and EPS of 3.68, the company is set to yield in earnings its book value within a couple of years. Its TTM price/sale ratio is 88% and its profit margin was a healthy 34.7% in June 2013, and has stayed above 30& for over a year.
Any stock with these metrics in the USA would scream “buy”—it was indeed these kinds of metrics that Buffett saw in the beginning of his career, and which turned him from a modest millionaire into one of the wealthiest men in the world.
So what is AVGR? It’s an agricultural stock that produces and processes eggs, chicken hatcheries, and livestock feed. It’s a large national company with many operations in Crimea, as well as throughout the Ukraine with exports in eastern Europe and central Asia.
Some value investors are already looking at the stock with enthusiasm. Nate Tobik, who writes the wonderful Oddballstocks blog, has a brief writeup about the company’s cheap valuation. Catalpa Capital’s Dave Waters has a much more detailed post pointing out the great potential of this undervalued stock.
Both Tobik and Waters have an extremely good investment thesis that is well supported by the stock price and underlying numbers, but that doesn’t mean investors should blindly buy up the company. Risks (which both writers are quick to point out) remain, and this is where all investors need to focus their attention. We know that the stock is undervalued, so now we need to ask ourselves what risks exist, and how great are they?
There are two main types of risks: the geopolitical and the managerial. On the geopolitical side, there is reason to worry that the breakup of Crimea could fracture the business and disrupt operations, or that a war could disrupt the company’s customer base, and disrupt sales. On the managerial side, non-Ukrainians need to learn whether the accounting principles in place in the Ukraine are reliable, who the company’s management is, how its capital structure can be disrupted or changed, and so on.
The only way to address both of these questions is with due diligence. What does that mean? A potential investor in this company would need to go to Ukraine and find out how like are a war, a splintering of Crimea, or a disruption to the local economy. Also, the investor would need to take meetings with Ukrainian accountants, farm experts, chicken farmers, egg vendors, and so on to see exactly how reliable this company is and how firmly it has a hold on its market share.
This is why the stock remains cheap—this level of due diligence requires a lot of money, expertise, time, and attention.