Finding Value in an Overvalued Market

Kennouth Investments                                                                                                      12/13/13

Where to Find “Blood in the Streets” in an Overvalued Market

            With so many money managers and investors saying stocks are well valued, where are the pockets of opportunity?  A few probably won’t surprise you.  IPOs like Twitter, Sprouts, and now Hilton have proven to make high returns this year, and I’m sure that trend will continue for a long time, as long as you’re selective in your stock picks.  Some stocks, like Apple, Google, Starbucks, still have a ton of room globally to expand their reach into those markets.  And there are some that have been hit especially hard since ’08 & ’09 that are just recently starting to recover their market share.  But since America is awesome at outperforming the world, we need to look outside the border to find growth similar to what the U.S. market has experienced over the past five years.

Not only was National Bank of Greece (NBG) hit hard by the Great Recession, but Greece has struggled to overcome its deficit issues and employment problems, comparatively more than the rest of the EU members.  In Spain, another EU country plagued by high unemployment, Banco Santander (SAN) has weathered the storm better than its parent country, and is well situated in a healthy trend line for the past year.   Lastly, Petroleo Brasileiro (PBR) has fallen 79% since the highs of ’08, but now with a developing South America and Africa, they are set to make a big profit since the a significant amount of Brazilian automobiles run on sugarcane ethanol. 

National Bank of Greece

If an investor bought $10,000 worth of shares of NBG in 2008, that $10,000 is now worth somewhere around $389.  That statistic alone turns multitudes of investors away.  But if you could ask any Rothschild, they’d say this is the best time to buy NBG since 2008.  A year ago, there were riots.  In August of this year, it had a credit rating upgrade, and its second quarter core earnings amounted to 999 million euros, an 8% improvement from the previous quarter.  It also allowed the bank to more than cover its provisions, which is the first occurrence in NINE quarters.  S&P Capital IQ reported the “Net interest income for the second consecutive quarter suggests that the downward cycle is bottoming out.”  Despite reporting a net loss for the third quarter, Fitch Ratings upgraded the mortgage covered bonds from ‘B’ to ‘B+’.  Currently, it has a P/E ratio of 12, another good indicator of an upcoming rise in the stock price.  Lastly, as the chart shows, the volume only reaffirms everything written above.1

Banco Santander
From a technical standpoint, SAN is approaching a very good buying opportunity, while reaching an oversold position at the same time.  A yearly chart for SAN looks a bit inflated, but considering the purchases SAN has carried out, it makes more sense.  In September, HSBC Holdings PLC sold its bank of Shanghai stake of 7.8% to SAN.  It also bought a stake in a Spanish retailer El Corte Ingles for $190 million.2   Along with volume, it is of my opinion that these asset purchases are being reflected in the stock’s price movement.  For the past six months, SAN has moved very nicely through its linear regression channels, and is now at a 6 month support line.  Given its recent 9% decline from October, SAN has is still up 34.5% since July.  This is a healthy move for this stock and its market and is just evidence of modest profit-taking.  In retrospect, the only negative aspect regarding SAN is the moving averages suggest further decline; somewhere around another 5% at $8.00 or $7.75.  If you’re a dividend investor, I’d be buying now.

Petroleo Brasileiro

            Interestingly, PBR might be riskier than the European bank stocks.  Faced with management issues and constraints, a weakening real, and low domestic fuel prices, it has been difficult to sustain growth.  Because PBR is a joint stock corporation with Brazil’s federal government, rising fuel prices often meets stiff opposition.  This stance by the government is enforced in the hopes of faster GDP growth for Brazil and to produce exports.  It’s not clear whether these constraints cause the gas price to be pushed down relative to the cost of crude oil, or if PBR doesn’t have the refining capabilities.  From now until 2017, PBR plans to spend $3 billion on oil infrastructure and another $8.6 billion on its downstream.  Here’s how PBR is overcoming these headwinds.  Since 2007, PBR has made multiple oil and gas discoveries, one of which includes the Tupi field, amounting to somewhere between 3 – 5 billion BOE (barrels of oil equivalent).  In 2011, 35% of its capital investment was spent on improving its downstream, and in June, the company announced a joint venture with another company to take place in Africa, expecting to bring in proceeds of $1.525 billion.  Lastly, S&P Capital IQ has a 12-month price target of $18.00.3    

          

 Chart software thanks to TDAmeritrade's thinkorswim software.

            

            1. Oja, Erik, “Nat’l Bank of Greece ADS,” S&P Capital IQ, McGraw Hill Financial, accessed December 12, 2013, https://research.scottrade.com/qnr/Stocks/GetPDF?docKey=72-63364370-6SL9QMR21IHUB43STD4LS9KRKI.

2. Ogg, Jon C., “Is Banco Santander Becoming Safe to Invest in Again?” 24/7 Wall Street, WordPress, accessed December 12, 2013, http://247wallst.com/banking-finance/2013/12/10/is-banco-santander-becoming-safe-to-invest-in-again/.

3. Kay, Michael, “Petroleo Brasileiro SA,” S&P Capital IQ, McGraw Hill Financial, accessed December 13, 2013, https://research.scottrade.com/qnr/Stocks/GetPDF?docKey=72-71654V40-1M6ATTS47N1L1IDRP7L4N7F676.

Disclaimer: Trading stocks has extremely high risks, and should not be taken lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. As of this writing, we (Kennouth Investments, Learning and Research) are long NBG and SAN, and unaffiliated with all other companies that are mentioned on this blog, and can't be held responsible for any losses that may occur. Invest at your own risk.