I spent even more time than usual lying around over the course of the weekend. Those of you who have geeky pre-teens in your homes will appreciate that I threw my back out moving a very large homemade Tardis lookalike bookcase into my youngest child's room.
As a result, I spent a lot of time on the phone catching up with some of my astute investor friends. A lot of the talk was about the global macro picture. As always, I am amazed at how many people have very definitive ideas about how the world financial and geopolitical picture will play out. I have no clue, so when pressed to provide a macro view of the world and investable opportunities, I use Sir John Templeton maxim of looking for the point of maximum pessimism.
I can tell you from a simple look at my account that one of the highest pain points in the world today is European banks, particularly the Greek banks. They have been falling like a rock since the eurozone stress test results were released. I read the earnings reports from two of the four big banks in Greece over the weekend and the selloff seems like an overreaction. The Greek banks are seeing improvements in credit quality and are on track for a fairly successful 2015.
On the Alpha Bank (ALBKY) conference call last week, COO Spyros Filaretos told investors, "Turning to the bank, our operating performance continues to build up momentum and confirms the solid output trajectory, including revenues and delivering the cost cutting targets." The CEO of Eurobank (EGFEY) Christos Megalou said in his press release: "Having the necessary liquidity and loans to deposits ratio below 100%, we can finance our customers, households and businesses. The results of the third quarter 2014 lay the foundations for Eurobank's return to profitability in 2015."
The Greek economy is not necessarily the best in the world right now but there are some signs of a recovery and that is expected to gain a little momentum over the next year. These banks are deeply undervalued right now.
There is a reason that some of the smartest hedge fund types in the world have invested in the Greek banks. Investors David Einhorn, Seth Klarman, Prem Watsa, John Paulson and Wilbur Ross all have significant stakes in the Greek banks right now, and it is not because they are trying to create tax-loss carry forwards. At the recent Robin Hood investment conference in New York, Einhorn outlined the case for his Piraeus Bank (PBIRY) and Alpha Bank positions telling investors, "After swallowing the bitter medicine, Greece now appears to be on the road to recovery. GDP is turning positive and should accelerate next year." He added, "We believe that in a few years Alpha and Piraeus will reach that, and when they do, should easily trade at 10x earnings and 1.5x book. " That would be a huge return of several multiples of the current share prices.
The other maximum pain position that is obvious in the world is Brazil. When I first starting buying Brazilian stock a couple of year ago I suggested that I expected it to be a very long, very bumpy and wildly profitable ride. For a brief moment, it looked like Dilma Rousseff would lose the election and the ride would speed up but that failed to play out.
President Rousseff has promised to do better this time on the business and economic fronts but she is off to a rocky start. Brazilian industrial production has fallen in five of the last seven months and there is talk of power rationing in the nation. I still own my shares of Petrobras (PZE), Gafisa (GFA) and Banco Santander Brasil (BSBR) as well as some stocks that are too thinly traded here in the U.S. to talk about. I suspect I will for some time. Keeping the position size small and using weakness as a chance to buy on a scale helps me stay in the game. I use volatility rather than suffer from it.
I have no idea what will happen around the world over the next few years. I do know that over time assets that are cheap will usually revert to the mean. That provides an opportunity for long-term, patient investors who concentrate on valuations. Sir John made a lot of money for himself and investors by focusing on the point of maximum pessimism and the strategy should work just as well for us as it did for him.