This Controversial Country’s Stocks are Down but Not Out

The price of an asset – be it shares of stock or bushels of corn — is determined not by its intrinsic value but by the relative demand of a specific consumer. This is the heart of growth investing, and the “specific consumer” is more commonly but not very nicely referred to as “the greater fool.”

The Greater Fool Theory is an actual thing, and all growth strategies are predicated on it. The premise is this: Investor A (that is, you) is willing to offer Price X for an asset until a Greater Fool (some other guy) offers a higher price. The upper limit of growth investing is thus hemmed in by the supply of Greater Fools. Once they run out, for whatever reason, asset prices begin to fall.

The U.S. market, as measured by the S&P 500 as well as the Nasdaq, is at a crest. So, it’s a smart time to gauge the remaining fool supply, and perhaps to look for the opportunities fools tend to overlook. They like rising prices. That makes me look for falling prices. And I’m looking at you, Russia.

Russia, the largest country by area in the world, is 1.8 times the size of the United States. The country, whose population is about half of ours, is loaded with natural resources, especially petroleum and metals. That means Russia’s fortunes are tied to commodities.

Data from the International Monetary Fund shows that prices for commodities worldwide are under significant pressure. They have been for a while, and for years longer than the COVID kerfuffle. In 2011, for example, the IMF’s all-commodity index was at 185.5. Last year, the latest for which data are available, the index clocked in at 117.6, a 36.6% decline. Metals are down 35.6%. Energy, a critical Russian revenue source, is down 44.1%. Oil and gas prices are off a third in the same time frame. Things in the Motherland are tight.

Data from The Economist shows the Russian market has declined by about 20% so far this year, a stark contrast to the mid-single-digit gain in the S&P and the whopping 23% gain in the tech-heavy Nasdaq Composite Index. After the year we’ve had, how many more fools are ready to pile into a U.S. market already valued at 29.8 times earnings, which is roughly twice its long-term historical median of 14.83? My sense is not enough to make it worth our while.

The MSCI Russia Index, which tracks the 23 largest publicly traded companies in the country, has fared a little better. It’s off about 7% year to date. The 10-year annualized return is 11.83%, which exceeds the typical annual gain captured by the S&P by about 1.83 percentage points. (From 1965 through 2019, the S&P has achieved a 10.0% annualized return, including reinvested dividends.) Ceteris parabus — a fancy Latin phrase for “all other things being equal” — a hyper rational investor would choose the Russian market over the S&P for a long-term allocation.

The good news is you don’t need to be a fool to see the compelling value in the Russian market. The average dividend yield of the stocks that make up the MSCI index is 6.4%, which matches the current payout on the Russian 10-year bond — a far cry from the 0.66% currently available on U.S. Treasuries. The index’s composite earnings multiple is an astonishingly cheap 8.3, which is just a third of the valuation commanded by the U.S. benchmark. And Russia still has the 11th-largest economy in the world.

It gets better still: U.S. equity assets command a premium. But Russian equity assets are selling at a discount. A dollar’s worth of Russian assets is commanding only 83 cents. By contrast, each dollar of net assets on the balance sheet of an average S&P company is valued at $3.64. The difference accounts for the value of the business. Right now, investors don’t just get Russian assets for less than they’re worth, they also get their future business results for free.

But even small ETFs bring another benefit. You can see what’s in them to explore your own ideas on a particular theme—like working from home. Among its top 10 holdings, you’ll find firms like Zoom, Twilio (TWLO), which enables workforce collaboration across locales, data-storage company Box (BOX) and Ping Identity Holding (PING), which helps ensure secure network access as we log on to corporate networks.

My favorite stock in this fund is Inseego Corp. (INSG), which is reasonably valued in the context of strong growth ahead. As shares have pulled back from their 52-week high of $15.25 in early August, they now hold clear value, trading at just three times projected 2021 sales.

Inseego sells gear that opens up business networks to Internet-of-Things (IoT) communications.

I am even more intrigued by the other half of Inseego’s business: providing 5G networks for home-bound workers (and those that are taking their work to a second home or a campground) through “hotspots.” Those are the little devices that people can use to bypass home networks and wi-fi. And optimized for 5G wireless speeds, they’re super-fast.

In the second quarter, Inseego saw a 44% spike in revenue as working from home really took root. And look for more strong growth as the company lines up new partners. On a recent call with investors, management said that Inseego will launch eight new products across six wireless carriers in the final months of 2020.

The timing for an aggressive slate of new product launches is just right. CEO Dan Mondor recently told investors that “the dramatic shift to remote work and distance learning has increased the demand for our products. To meet this sudden demand, we scaled up our production capacity and supply chain in a very short window of time.”

It’s interesting to note that consumers aren’t yet lining up in droves for these high-speed work-from-anywhere devices. Instead, employers are buying them on behalf of their employees. And it is not just about speed. “Organizations understand they have a distributed workforce and it increases their exposure to cyber threats,” added Mondor.

Investors are catching this company at the perfect inflection point. While annual sales had been stuck at around $200 million to $220 million in 2017, 2018 and 2019, they should approach $300 million this year and exceed $350 million next year, according to Lake Street Capital. Just as important, operating profits should nearly double, to around $14 million this year, and reach $48 million next year.

Action to Take: Consider buying shares of Inseego up to $14 and sell when they reach $20.