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Russian Retailers’ Stocks Selling At Steep Discount

As a big emerging market, Russia offers opportunities for growth in the consumer sector, analysts say. For investors willing to look beyond the major oil stocks, which already have risen dramatically since last fall, some Russian retailers’ shares are selling at bargain-basement prices.

The Russian equity and fixed-income markets were mispriced last year in anticipation of widespread defaults and bankruptcies, says Chris Osborne, CEO of Troika Dialog USA, arm of the largest private investment bank in Russia. Investors began to realize in February and March of this year that rising oil prices were bullish for the Russian stock market and they started buying exchange-traded funds. Russia went from being the worst performing market in the world last fall to the best in the first half of 2009. “It is no longer easy to make money on an indiscriminate macro call on Russia’s economy,” Osborne says. “It is necessary to pick individual stocks.

In the consumer sector, Troika Dialog recommends X5, Russia’s largest retailer, and grocery store chain Magnit. Their shares are trading at a 35% to 40% discount to similar emerging market retailers, Osborne says.

Troika Dialog also likes Sberbank, the former monopoly savings bank, which is transforming itself into a commercial bank. Sberbank’s share price has been beaten down by exaggerated projections on non-performing loans, Osborne says. “Another pure domestic play is Novatek, which sells natural gas to Russian companies and utilities,” he says.