Value ideas 2016

2016 has just started. Time to look ahead. I’m not trying to forecast or predict any market movements but in my opinion there are a couple of markets and sectors which are very depressed and most likely undervalued. Baron Rothschild said once: “The time to buy is when there’s blood in the street.” I see blood in the street and good opportunities in the following markets:

  • The commodity sector:

Shares of gold mining companies fell for five years in a row while gold didn’t drop that much. Many companies managed to reduce capex a good bit and are running very profitable with current gold price levels. I know that gold is seen as dead capital and the mining sector in general is a very difficult business to be in but how much lower can prices of the major mining companies fall after they have dropped already 80% and more? 

Silver dropped even more than gold given the industrial usage. There were massive production cuts last year causing demand and supply to become unbalanced. Therefore I think it will have a much larger upside potential than gold. Investing in silver is not for someone with weak nerves though as it’s much more volatile than gold.

It might be a bit too early to invest in oil companies as the majors didn’t come down much considering the massive price drop of oil but bottom fishing is not easy and definitely my strength. Thats why I keep accumulating oil stocks while prices are low even though they could fall further a bit. With lower prices, demand will raise and supply will go down – a perfect base for creating an undersupplied market. Given the ongoing drop of rig counts in the US and that almost no oil company can produce profitable with current prices,  oil can’t stay so low for long and many companies with good balance sheets can be bought for much cheaper than one year ago. Another advantage of oil vs. other commodities is that oil as a commodity once used can’t be recycled like for example precious metals.

Mining shares of other commodity sectors such as iron ore, cooper and coal are depressed as well but a recovery might take a bit longer due the current downturn in the global economy, the massive oversupply and environmental aspects.

Uranium could become a favourite in the commodity sector considering the reactivation of many reactors in Japan and the trend looking for cleaner energy than coal opening new plants over the next years in China and India. I purchased recently a miner in the sector and planing to write a post analysing the company in more detail. 

  • Brazil – it might be a bit to early to call for a recovery in brazil as there is a huge credit issue, a popping property bubble and political risk in the country but companies are already very cheap and sold much below book value. Some very traditional companies with large insider ownership are priced with price/book ratio of 0.20 which is ridiculous low. The risk here would be management buyout or delisting and I don’t know much about the Brazilian regulation protecting shareholders. Any opinion on that or do you know more about it then please leave a comment or contact me.
  • Russia – The market is very cheap and there are chances that Russia surprises. It is the largest country in the world with a population of 144 million and enormous natural resources. However there is lots of corruption in the country which is not being resolved and the political risk is too high. I initiated only a small position in an Russia ETF to be in the boat in case the country surprises but given the risk factors I don’t see many investors putting money on Russia which will lower the chance of a massive stock market recovery becoming a potential value trap.
  • Greece – Certainly depressed as well but the political issues are not the resolved. Urgently needed reforms are not implemented. Therefore no position in Greece.

Markets already in recovery phase:

  • Vietnam – my favourite.
  • Austria – The overall Austrian market is quite cheap with a average price/book value of around 1. The higher exposure to eastern europe, especially to Russia and Ukraine dragged down prices of many solid and well management companies. I think this is one of the most conservative plays while receiving good dividends in the meantime. The average dividend yield of the ATX is around 3.6%.
  • Argentina – political change might improve the economic situation which is on depressed level.
  • Spain (political risk is rising after the recent elections but the economy is recovering from a very low level. I work with many spanish people and I’m really impressed with their hard working ethics.)
  • Portugal 

I initiated positions over the last year and planing to increase stakes in above sectors/markets in 2016. I’m really excited about all of them and looking forward to write posts about each market/sector and the companies I hold stakes in.

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