Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
In a press release earlier this month that surprised few, the Greek Finance Ministry announced that the country would not be meeting its deficit targets as stipulated in its bailout agreement. Greece’s deficit is expected to top 8.5% of GDP, even as the Greek state has enacted massive spending cuts.
Unfortunately, Greece has found itself in a bit of a downward spiral. When it enacts austerity measures to cut expenses, it deepens the recession and causes tax receipts to fall faster. “Expenses” to the Greek state are “income” to many Greek citizens.
Greece’s lenders may have mercy on the country and extend the next installment of its bailout package. Or voter unrest at home may force Germany and the other lender states to cut off Greece’s lifeline and simply deal with the consequences of default on their own banking systems.
But whether it happens today, tomorrow, or next year, a Greek default is a virtual certainty at this point. The country’s debts are expected to be 166 percent of GDP next year, and that debt ratio is almost certain to rise even if Greece toes the austerity line and reduces government spending because the denominator—GDP—is shrinking, even as debt continues to rise.
The news for investors is not all bad, however. A Greek default, when it eventually happens, will most likely create some fantastic opportunities for investors with the intestinal fortitude to, as Warren Buffett says, be greedy when others are fearful. It is during these “blood in the street” moments when investors are able to pick up solid assets for pennies on the dollar.
That day is most certainly not today, however. Greek stocks are not expensive by world standards, but they are not exactly dirt cheap either when compared to their peers. The Financial Times reports that the Greek market sports a P/E ratio of 8.9 and a dividend yield of 4.7% as of 9/29. That’s not significantly cheaper than Germany (P/E of 9.6 and a yield of 3.6), and the “E” in Greece’s ratio—earnings—are much more questionable than Germany’sat the moment.
Still, in waiting for that day when Greece eventually does default, I have put a couple of Greek ADRs on my watch list.
I’ll start with the Coca-Cola Hellenic Bottling Company S.A. (NYSE: CCH). Outside of buying a prime tourist property on one of Greece’s picturesque islands, this is probably the most durable investment one can make in the Eastern Mediterranean. Coca-Cola Hellenic Bottling is a bottler of Coca-Cola products. The company produces, sells, and distributes carbonated soft drinks juices, waters, sports and energy drinks, and other ready-to-drink beverages. Drinks makers tend to be recession resistant, though a deep enough recession will bite into Hellenic’s sales, as would a prolonged tourism drought. The company trades for a modest 0.7 times sales as of 10/3, though it will almost certainly get cheaper in the event of a Greek default.
I’m also keeping an eye on National Bank of Greece SA (NYSE: NBG), the largest and most influential Greek banking group with operations in Turkey, the United Kingdom, South Eastern Europe, Cyprus, Malta, Egypt, and South Africa. We all know what happened to the American banking sector in the 2008 meltdown, of course. But in 2009, many of the banks that survived the meltdown delivered triple-digit gains for investors brave enough to scoop up shares at the bottom. National Bank of Greece trades for just 0.36 times book value as of 10/3. Of course, in the event of Greek default, that “book value” won’t be worth all that much.
I want to repeat a very important point: I’m not buying these stocks right now. While fine companies, they have the misfortune of operating in a basket-case country and are simply not cheap enough in my assessment, given the probability of Greek meltdown. This is the time to be patient. After a default, I’ll wait a few weeks or even a few months for the dust to settle. I probably won’t time it exactly right, but that’s ok. Like horseshoes and hand grenades, I believe “close” will likely be good enough.
