Brazilian Burgers, Mongolian Real Estate, Africa and Ligand

by Travis Johnson, Stock Gumshoe | May 16, 2014 8:20 pm

A little selling, a little buying, and some updated thoughts on growth and "Frontier" holdings for the Friday File

Before I get churning with this week’s Friday File, I want to take the opportunity to thank you, the Irregulars — and particularly the several new members we’ve had join up as Irregulars in the last few weeks — welcome to the club! Stock Gumshoe has always tried to balance how we do things, offering up a great free service to help folks think for themselves and avoid making marketing-driven decisions about investments and supporting that free service with advertising, but also trying to share some ideas and build a community of investors who are interested in thoughtful chatter about all kinds of investments.

As we’ve grown, the support of the Irregulars has meant we’ve been able to upgrade both our content and the technology we use to deliver it (we brought on four paid contributors in the last year who I think bring great perspective to our community, and who can write about topics that I don’t understand, and we’re spending a lot of that Irregulars money on upgrading the site to add some features, make it more stable, and upgrade our servers in the next month or so). Hopefully all of this is completely unnoticed by you (other than the occasional smile at a new feature or the gift of an extra second of your time as the site loads faster), because that means we’ll have just been quietly helping the foundation stay sturdy while the spires of Castle Gumshoe grow off in all directions… but I do want you to know that I appreciate the contribution you make to keeping this site going (and growing).

Now, back to our regularly scheduled programming.

The last few months have had me thinking some more about emerging and frontier markets — partly because there was quite a bit of chatter about these markets when they bottomed out again in February and early March, partly because several of my holdings in foreign countries have generated some news of late, and partly because, well, I remain pretty cautious about the big, developed debt-fueled countries and their ability to grow enough to justify the valuations we see in the broader market. If even the United States economy can’t post above-average growth this year, with the tremendous capital available to invest at extremely low rates, it’s hard to justify buying average companies who might be dependent on economies with demographic challenges and below-average growth. The economy is chugging along but the stock market has boomed, the kind of environment that sends you searching for the unusual, the cheap, or the unknown.

When I think about what investments might do in the 10 or 20 years that I’d like to own them (or longer), I feel more comfortable with the prices I’d pay now relative to potential growth in some foreign markets than I do with the prices I have to pay to buy good stocks in the US. Of course, a lot of this potential comes with substantial risk… so I diversify (probably overdiversify) my portfolio and don’t make big bets on such stocks, because even with a very long time horizon I don’t take great joy in holdings that drop by 50% or more.

So that’s the big picture. The small picture, of course, brings lots of worries — smaller companies in overseas markets bring a substantial amount of currency risk (even if the company does everything in its power very well, as US investors we might find that their earnings in US$ terms are lousy if their currency is falling versus the dollar), they are often harder to research or trade, the accounting is sometimes different, etc. etc. And I have had plenty of losing bets in emerging and frontier markets over the years, both because of badly managed companies and because of investor boycotts of emerging markets (and because of plain old bad choices on my part).

My general preference is to have some expert help in managing these kinds of investments in areas where I have absolutely no idea how to pick or trade stocks, but in places where there are reasonable, somewhat liquid and tradable stocks with decent filings that I can understand I do like to nibble from time to time on ideas that pop their head up and catch my attention. You can see that in my personal portfolio, with names like Africa Opportunity Fund, Brazil Fast Food, and others — and in stocks I have focused on for the Irregulars in the past but don’t personally own (dammit), like Nagacorp in Cambodia. And though I try to buy these stocks when they look unusually cheap, I really resist selling them just because they become pricier — that’s mostly because the regrets of stocks long sold haunt me, and it’s probably a personal weakness (next time you run into me at a bar looking maudlin, I’ll probably be thinking about the 100% profits I booked in Tencent five years ago… before it went up another 1,500%).

But I do have a sale today, future regrets be damned, so let me start with burgers.

The story of Brazil Fast Food (BOBS) has been a fascinating one for several years now, and I think it’s finally time to make a change to that position in my portfolio. Brazil Fast Food is owner of the Bob’s hamburger chain in Brazil, which is basically their homegrown version of McDonald’s (it was founded by an American in 1952), so they franchise out those stores and also run a few themselves, and they also own franchises for Pizza Hut and KFC that have generally grown very nicely over the years (along with a few other businesses, including a Chilean hot dog chain and a yogurt chain). I bought and recommended BOBS four years ago[1] because it was unbelievably cheap for a fast food chain in an “emerging middle class” economy like Brazil, where there should be huge growth potential, and it has done very well. We were also anticipating substantial gains from the arrival of the FIFA World Cup in Brazil, which starts in less than a month now, and the next Summer Olympics, which will hit Brazil in 2016.

The stock has been a good performer in part because they’ve restructured over the years, focusing more on franchising (which is a great model, using other peoples’ money to grow) and on expanding their portfolio of brands and flexibly building out smaller kiosk models and the like. But it’s a very tough business environment for them right now in Brazil, and has been for a year or more, with increasing competition from global brands (Burger King is now owned by Brazilian investors, McDonald’s is continuing to push into the market more aggressively) and regulatory pressures both on their costs (particularly labor costs) and on their menu (obesity taxes and the like) in Brazil’s current low-growth, high inflation straits. This hit my brain earlier in the week because they released their first quarterly results (they no longer file with the SEC, which was not in itself quite enough reason to sell but is frustrating in that it limits the data they share… they do issue the press releases and provide some detail on their finances).

Here’s what the CEO, Ricardo Bomeny, said about their first quarter results this week[2]:

“We continued to experience a very challenging operating environment in Brazil’s fast food industry during the first quarter of 2014, characterized by escalating costs for food and labor, muted growth in incomes and consumer spending. The market environment has also turned increasingly competitive, due to significant branding efforts of one of our established competitors sponsoring the upcoming FIFA World Cup. Renewed efforts of established international brands to increase share in Brazil created fierce competition between incumbents and expanding international brands in fast food. This has required increased investment in branding, facilities and promotions, and made it challenging to pass through these higher costs to our customers. While our revenues continued to expand at over 14%, our profitability dropped significantly as compared to the first quarter of 2013, with operating income down 35,2%”

What does that translate into? Earnings per share of R$ 0.56, which is about 25 cents in US$. Dramatically worse than last year because of higher costs, flattish revenue and a generally weak operating performance — despite the fact that they continue to add new locations and bring in more franchise fees (many of the new locations are smaller or kiosks).

And, as management said when they tried to buy the company out from under shareholders at $15.50 last Fall, competition is continuing to heat up. That means they have to invest more in promotion and in refreshing stores. Timing might be good for that if they are able to get a boost at all from the World Cup, which would mollify their franchise owners and make some of them happier about investing in facelifts and upgrades for the stores, but it’s not necessarily going to be easy — Brazil Fast Food has seen tightening margins for their owned and operated stores, which hasn’t hit their financials too hard because franchising has been a growing part of income for them, but those same margin pressures are also pressuring their franchise owners.

I think BOBS management is still likely doing a decent job — they’re in a very challenging environment with high cost inflation and a weak Brazilian economy, and their competitors are bigger and stronger and are spending more on marketing. BOBS is still possibly a good long-term investment, management owns the majority of the company and is probably making sensible choices about where to invest and grow, but I think we’re topping out and BOBS is now overvalued. I will be selling my shares above $18 in the coming week (unless they collapse well below that level on Monday, of course — I’ll let you know if my personal sale is delayed).

Several times over the last couple years I’ve considered swapping out of BOBS and putting that capital to work in Arcos Dorados (ARCO) instead (ARCO is the master franchise owner for McDonald’s in Latin America), but BOBS continued to look cheap and reasonable. A year ago, for example, we were looking at BOBS with a trailing PE of under 10 and the anticipation that buildup to the World Cup would likely increase investor interest in the stock, so I held on.

Now, however, I think BOBS is overvalued at 18X trailing earnings (past four quarters totaled up to 99 cents in earnings at current exchange rates) and likely to have weak earnings for at least the next couple quarters, with probably no earnings growth in the near future, so I’m selling because I think that’s likely to mean a pretty hard downdraft for BOBS shares and they’re illiquid and hard to sell when the price is dropping… but I’m not yet decided on ARCO. ARCO is far larger, is a bit more complicated, and may get a solid boost from the World Cup (since McDonald’s is a major sponsor), but ARCO is currently a wounded whale thanks to competition and inflation in Brazil, regulatory problems in Mexico, tumult in Venezuela, and inflation in Argentina … and is still transitioning from the growth stock that the world thought they would be when they went public a few years ago into what is almost a deep value stock (it was one of the more interesting ideas at the Value Investing Congress, as I noted here[3]). So I’ll be holding proceeds from that BOBS sale in cash for now, but keeping an eye on ARCO — I’ll let you know if I decide to buy shares.

You, of course, might well choose to do something completely different — I have little certainty about where BOBS will be in a year, but I wouldn’t buy at this price and my thoughts about the risks in Brazil and in their competitive business tell me that means I should sell and take profits from a very nice multi-year run. It’s important to remember that if you are inclined to sell an illiquid small cap stock, particularly a foreign one with limited US trading, it’s far easier to do so when the stock is going up… when they do fall, they sometimes fall quite quickly.

And on the other side of the world, in a country that is even more dependent on China than is Brazil, we have… Mongolia. The growth darling of frontier markets a few years ago, the poster child for nonviolent political risk, and still one of the fastest growing economies in the world. We touched on Mongolia a few times back when every growth investor loved the country, but haven’t checked in for a while.

Mongolia itself is a small cap to a degree that’s a little bit hard to imagine for US investors — The country is physically large, roughly the size of Alaska, and home to a wealth of natural resources, but the Mongolian GDP puts the size of their economy at just over $10 billion, that’s what it produces in goods and services in a given year. (That’s from 2012, before the Oyu Tolgoi mine opened but it won’t be dramatically higher in 2013 during the initial ramp up of the mine and the associated development. Alaska’s GDP, in case you’re curious, is almost $50 billion thanks to oil.) That means the Mongolian economy is less than half the size of El Salvador’s, and slightly bigger than Laos or The Bahamas. That’s largely because the population is tiny (three million people, about a third of whom live in and around the Capital… though that is, to continue our largely pointless comparison, three times the population of Alaska) and it’s been a subsistence-based nomadic economy for decades, relying on cashmere sales and small scale (at least after the Russians left) coal sales for their foreign exchange.

So the base is extremely small, which is why Mongolia can post huge GDP growth from a relatively small amount of foreign investment and economic development — the GDP is likely to continue growing at between 10-15% for the next few years as Oyu Tolgoi ramps up to full capacity (projections are for this one mega-mine to account for more than a quarter of Mongolian GDP in the next decade) and Tavan Tolgoi (a nearby mega coal mine) gets fully developed, and the government (which has already issued bonds, pretty successfully, for this purpose) invests to upgrade the infrastructure, including rail lines, roads, and upgrades to utilities and roadways in the capital, Ulanbaatar.

That’s the background, with the assumption that copper, coal, gold, silver and perhaps oil will bring long term growth to Mongolia after several decades of no real development. And that has spurred a lot of interest among foreign investors over the years, particularly in 2010 and 2011 when Oyu Tolgoi was just starting to be built and the government had not yet stepped in with additional demands to scare off foreign investors. The fall in commodity prices and fear of China’s waning growth (Mongolia’s exports go almost exclusively to China), along with the difficulty in funding mineral exploration projects, seems to have forced Mongolian politicians to realize that they went a step too far in deterring foreign investment. The pendulum seems to be swinging back the other way now, with new leadership and a focus on investing for better-managed economic growth (I’m certainly no expert on Mongolian politics, that’s just my impression from loosely following them in the news for a few years — there’s an interesting recent article here from The Guardian[4] if you want to get an idea of the current state of the country). And that makes me a bit more optimistic about my one real investment in Mongolia, Mongolia Growth Group (YAK in Canada, MNGGF on the pink sheets), a very speculative long-term investment that I’ve mentioned a few times and that has periodically been teased by Chris Mayer for his newsletters.

YAK has been around for several years and has had some existential problems for much of that time, particularly in figuring out exactly what they were going to invest in and how they were going to grow and become profitable. The initial strategy was essentially just that a few hedge fund guys wanted to take some long-term equity and create a Mongolian company because the country was clearly going to show tremendous growth but there wasn’t anything really investable in the country yet — so they raised capital, including a lot of their own money, and listed on an alternative exchange in Canada and started throwing money at building a company that should benefit from Mongolia’s expected boom without being in the mining business.

They started by funding an insurance company in Mongolia and buying up condos and office buildings to serve the huge rush of expatriates who were rolling into town to make deals and didn’t want to live in a ger — with founder and then-CEO Harris Kupperman essentially, or so it seemed to me, flying into town and buying whatever was for sale. That strategy morphed a few times over the years, with investments in undeveloped property basically just sitting idle and with a gradual improvement in rents as they leased space and raised rents when leases expired, but they didn’t seem to be making a lot of headway.

So they sold their insurance company Mandal, which was tiny, and decided that they would refocus solely on real estate development — including an effort to make their holdings much more centralized and efficient. To that end Mongolia Growth Group recently went out and got a new CEO, Paul Byrne, who has worked in emerging economies as a real estate developer and who has quickly moved to bring focus on a plan of building a large commercial real estate management company. That’s going to require (more) money than being a somewhat rudderless owner of miscellaneous buildings in a far away land, so they’ve been selling off non-core assets to focus on their best office properties and, more importantly, on their key commercial space, mostly “high street” retail that’s in demand as international brands follow the money into Ulanbaatar. Paul Byrne’s introduction to the shareholders of Mongolia Growth Group is here[5].

What Mongolia Growth would like, above all, is to be the company Starbucks calls when they get the urge to put five coffee shops in downtown Ulanbaatar. The goal is to bring in outside capital to fund major redevelopment projects, getting up to scale much more quickly, and to do that they either need to create captive investment pools like a separate REIT or private equity funds, or they need to sell a lot of shares or borrow money. I suspect they’ll add a bit of leverage to the balance sheet, but they want primarily to lever their expertise in Mongolian property management by using other peoples’ money — contributing land or undeveloped property and expertise and using investment funds from outside the company, then maintaining partial ownership and getting management fee income. The founders continue to be large shareholders, and the new CEO bought shares at the market price when he was hired, and they seem to be resistant to the idea of mass equity dilution… which is good.

It sounds like a rational plan, and real estate should be a substantial beneficiary of Mongolia’s still somewhat unclear urban renewal and development plans as the economy grows, so I’m willing to go along for the ride. They have so far raised about C$50 million and spent about C$40 million on acquiring property, so at an $80 million market cap right now they trade for about twice what they’ve invested in building their assets (I don’t know if that investment includes their renovation or redevelopment work). After three years of ups and downs in Mongolia, and given the uncertainty of knowing what the fair value is of their property portfolio now, I think that’s still a reasonable valuation for a very speculative, long-term play on Mongolian development.

I started buying Mongolia Growth Group last year when it fell to $3, and added a wee bit more to my holdings today in the US$2.20 neighborhood — this is certainly yet another play that’s dependent on commodity pricing and Chinese demand, at least to some degree (since Mongolia’s development is being fueled by copper and coal, their only real near-term assets of great value), so I’m mindful of that as I assess the risk of my portfolio, but this is another of the small investments I make that are basically ways of getting experts to manage money for you in a market where you couldn’t reasonably invest on your own — in this case, “boom town” Mongolian real estate.

Another area where I look for expert investors to manage money for me is in Africa, where over the last year or so I’ve built a position in a London-traded closed end fund called Africa Opportunity Fund (AOF in London, AROFF on the pink sheets). There’s no particularly big news out of that fund, and it’s not necessarily a bargain buy right now (it’s trading for almost exactly what the most recently reported net asset value per share was), but they just altered their listing in London a bit and management recently raised some money so that they can go after additional investment opportunities… so it seemed worth checking in. This is a value investing fund, with a hedge fund fee structure (2% of assets/20% of gains over a hurdle amount), and they are pretty diversified across the continent but have particularly large investments in Ghana, Senegal and Zambia and substantial sector weightings in financial services, retail, telecom and mining. Unlike the Africa ETFs, their holdings are not dominated by South Africa, which is the most mature economy in Subsaharan Africa and, I think, a generally less compelling growth story than Senegal, Kenya, Tanzania, Zambia, Ghana and elsewhere. They also, coincidentally, have been mentioned by Chris Mayer in the past[6].

AOF recently moved to change its listing structure, essentially listing itself as a publicly traded fund on the LSE rather than as a corporation on the small-cap AIM, which seems to be of limited importance to small individual shareholders like myself — but for a closed-end fund like this to have cash to invest, they have to sell more shares. They just did so, creating a new class of “C” shares that they sold for a dollar apiece (the regular shares were around $1.20 at the time, and are still). This created a little bit of confusion because some folks initially thought that this meant the new shares were at a discount to net asset value — but that’s not actually the case.

In fact, what they did was raise a separate pool of capital by selling these C shares, which have the ticker AOFC in London — they will invest that capital into their ideas using their portfolio strategy, but still as a separate pool, and then, once more than 85% of the cash raised has been invested, the C shares should be converted to regular shares based on the net asset values of both C and regular shares at the time of conversion (so it won’t be 1:1). Here’s what they said in the prospectus:

“On such conversion, each holder of C Shares will receive such number of Ordinary Shares as equals the number of C Shares held by them multiplied by the Net Asset Value per C Share and divided by the Net Asset Value per Ordinary Share (subject to a discount of 5 per cent.), in each case as at a date shortly prior to Conversion.”

So there’s some chance that the C shares will end up getting a little boost when they are converted, since they’ll get that 5% discount at conversion… but it’s not a huge discount, and the pool of funds being invested for these C shares will presumably not be in exactly the same investments as the current portfolio, nor at exactly the same weightings, so it’s pretty much impossible to tell which class of shares will be better a year from now — though if they get a big idea that requires a large investment in the next couple months, that investment would likely be made using the C share capital. Right now, the net asset value of regular shares is $1.20 (as of April 30 — they report NAV monthly here[7]) and the NAV of the C shares is 97 cents. Conversion could also be delayed if litigation over the fund’s holding in Shoprite shares is underway in six months, which is possible (they’re apparently going to be sued for buying shares that Shoprite says they sold by mistake … they don’t seem terribly worried, but it’s the kind of wackiness you can get in immature markets and perhaps a good reason to use a fund manager). Essentially, buying C shares instead of regular shares now means you think the ideas they are looking to invest in with new capital right now will do better than the ideas that are already in their portfolio. Or, you don’t really care and you just want to buy whichever one happens to trade at a discount to NAV on any given day. Hard to predict whether the next six months or year will bring any drama, so I’m happy owning the regular shares — I didn’t buy any of the C shares in the offering.

Fund management is still sounding optimistic, they reported that their own internal assessment of the value of the portfolio was at $1.48/share for the regular shares as of March (trading closed at $1.22), and this is from their March newsletter[8]:

“Outlook: We believe that AOF’s portfolio possesses undervalued companies. Its top 10 holdings combined offer a weighted average dividend yield of 3.6%, a P/E ratio of 15.1X, a return on assets of 8.1% and a return on equity of 13.8%. We are excited by these attractive valuation metrics and remain optimistic about AOF’s prospects.”

So those are some of the ideas that have come to mind this week when it comes to risky overseas investments in our Gumshoe Universe.

And I also noted that Ligand (LGND), my biggest biotech holding, reported this week. If you’re new to Ligand, it is a pharmaceutical royalty company — they own rights to a portfolio of 100 or so compounds that are either acquired or legacy assets from their previous life as a drug developer, or drugs that are enabled by their Captisol technology (that’s a delivery material — essentially, a compound that improves solubility and makes it easier to create injectable drugs). They try to partner all of these compounds with biotech or pharma companies that spend money to advance the research and put the drug through clinical trials, and then if and when the drug is commercialized Ligand gets royalties (the royalty rates vary widely, from 1%-10% mostly) on the sales, along with sometimes milestone payments along the way when drugs clear various hurdles.

Ligand is still on the track it has followed since we started looking at them last Summer, it still has nearly 100 “shots on goal” in the form of fully-funded programs being carried out by their partners, and the company is gradually ramping up earnings thanks to growth in sales for their two largest programs, Kyprolis and Promacta, and to new product releases and milestone payments.

The big driver for any upside surprise above what’s expected would be if Duavee from Pfizer gets out of the gate with high sales very quickly, which is pretty unknowable even by Pfizer at this point (it just launched, Pfizer seems secretly hopeful that it will grow to be a blockbuster), and what the results are of Ligand’s own Phase 1 trial in their new diabetes drug that’s currently called LGD-6972. The goal for their diabetes drug is to get a bit of data in to validate the efficacy and safety of that compound later this year, enough that it gets a good partnership deal from someone who can invest millions into more clinical trials and provide Ligand with milestone payments and royalties as it moves through the approval process and (if) begins sales.

This quarter was slightly weak due to lower Promacta and Kyprolis sales, but they’re not sure why — that’s the downside of being a royalty owner, you don’t talk to the sales force or see the granular data, you’re passive. There are guesses that it’s a bit seasonal, or that Promacta’s rollout in Hepaticis C-related treatment is slowed by overwhelming new interest in Gilead’s new drug that is bringing new patients into the doctor’s office (not a competitor, but a distraction), or even that the “polar vortex” might have slightly slowed orders in the quarter, but those are just that — guesses — and we’ll have to wait and see what the year brings.

Their revenue is generally somewhat back-loaded because royalties are often tiered by annual sales — so the first royalties of the year can be at a lower percentage. LGND is still offering the same 2014 guidance of $1.40-1.45 in non-GAAP diluted earnings for the year — analysts are not pushing above that, the average analyst expects $1.45, but they are gradually raising their expectations for next year to be over $2.40 in earnings. So we’re still talking about a stock that trades for 25X next year’s expected earnings, and I still like it for incremental nibbling in the low $60s… with fingers crossed that the market will swoon at some point and bring the shares down to really attractive prices to load up again.

Buying growth is expensive sometimes, but when you’re buying growth in a non-capital-intensive business like this, where the revenue can scale up dramatically without requiring any more money from Ligand, it can really be worthwhile — Ligand doesn’t have to spend anything to earn most of their cash (the existing large royalty streams), and they have a strong eye on keeping expenses limited and only investing enough in new R&D (like their diabetes compound) to make it interesting for someone with deeper pockets. Many biotechs have extremely smart people running them, and they pursue fantastic science, but not a lot of them are focused on the efficiency of their R&D spending or the financial risks of swinging for home runs. I’m glad they aren’t because that’s sometimes how amazing discoveries with questionable economics are made, but it doesn’t make biotech investing easy.

I’ll let Dr. KSS[9] and others find and explain the great science and the potential winners, I like sticking with great financiers and managers in markets where I don’t personally have any expertise — and the folks at LGND are born-again penny-pinching capital-protecting profit lovers in an industry where losing money in pursuit of breakthroughs is often a badge of honor. It’s still an expensive company that’s heavily reliant on just two products, so there’s plenty of risk, but this is my favorite risky growth/momentum investment these days and I think they can compound earnings dramatically over the next several years.

My largest qualm about LGND is that they’re not seeing insider buying — there was a bit last year when it was still looking quite cheap, but there was quite a bit more selling when the shares hit the high $70s. Insider selling by itself doesn’t bother me, officers and early investors in companies rely heavily on future share price spikes to create their returns, so it makes sense for them to sell some when huge gains are made (large holder BVF, a biotech activist hedge fund, helped create the current LGND business model and was heavily invested in the stock when it was down in the $8-15 range several years ago, so they’d be irresponsible to their shareholders not to lighten up now, for example). But still, I’d feel better if officers were nibbling like I have been at these prices (my last buy was around $62 or so, last month).

Finally, I can’t talk about emerging markets without mentioning Russia. I’ve heard plenty of recommendations to invest in the broader Russian market in recent weeks, since everyone likes to be the one who said they bought with “blood in the streets” during a political crisis, and Russia is cheap (and was cheap before the crisis in Crimea, too).

Big names like James Grant have been climbing all over themselves to call our attention to the fact that Gazprom (OGZD in London, OGZPY on the pink sheets), standard bearer for Putin’s Russia, is among the cheapest stocks in the world — though it is also, we’re frequently told, among the worst-managed stocks in the world (Grant suggested Gazprom at the Ira Sohn conference recently, essentially saying that yes, it’s a bad company but it’s hard to imagine anything bad about it that’s not priced in at 2.5X earnings with a 5% yield). Gazprom has also been teased for over a year by the Oxford Club as the “most profitable energy company in the world”[10] and the “secret” stock you’ve never heard of and weren’t allowed to own … but their argument was that Gazprom was on the verge of getting a US listing, and that ain’t gonna happen now. There sure hasn’t been much reason to own it yet, it was cheap last year at about three times earnings, and it’s still cheap at about three times earnings, but it’s true that sometimes stocks are just so cheap that there’s no reason NOT to own them — I resist this time, for whatever reason. Gazprom is the cheapest real company I’ve ever seen, but I’m not buying it.

I have, however, been holding a much more expensive stock that’s also controversial and Russian, (MAIL in London, MLRUY on the pink sheets) — which is basically a web portal, online gaming, and social networking company in Russia, the only real substantial Russian internet company other than search engine Yandex (YNDX). was an early investor in facebook (and Groupon and Zynga, which they bragged about less) and paid out large special dividends over the last year or so as it monetized that facebook holding post-IPO, and they’re also controlled by a Russian oligarch, Alisher Usmanov, and have spent the last year in the middle of a dispute over the future of Vkontakte, the “Russian Facebook” that they essentially now control. Vkontakte, which now owns 52%[11] of, and Odnoklassniki, are by far the two largest Russian language social networks, with facebook a distant third, and owns Odnoklassniki outright, so they are clearly focused on this as a major growth driver.

Right now, though, it’s a Russian company that is extremely profitable and has been growing nicely … but with a sideline business in Vkontakte, worth perhaps a couple billion dollars (the current overall market cap for is around $6 billion) that has over the last month become of a management disaster — the creator of Vkontakte, Pavel Durov, has fled the country[12] after either being fired or quitting, and no one really seems to know what’s happening. Free speech and social networking is a politically touchy subject in Russia, so the hand of the government is certainly reaching in to and Vkontakte — I just don’t know what that will end up meaning in the end.

So I’m likely to look for an exit price on in the near future — Russia remains the last great growth market for the internet, and’s gaming and advertising revenue climbed very nicely over the last year… but as Crimea continues to escalate I’m suspicious about how much global marketing spend will go to Russia. And even Durov, on his way out the door, said that maybe Russia just isn’t ready for the internet. I’ve booked some decent gains from over the past couple years thanks to their large special facebook dividends, but I think I’m about ready to be done with this one. I will wait until my three day waiting period expires, since I’m mentioning the company today, but unless something changes my mind I’ll likely be exiting that position soon.

Have a great weekend, all.

  1. bought and recommended BOBS four years ago:
  2. first quarter results this week:
  3. noted here:
  4. interesting recent article here from The Guardian:
  5. Paul Byrne’s introduction to the shareholders of Mongolia Growth Group is here:
  6. mentioned by Chris Mayer in the past:
  7. report NAV monthly here:
  8. March newsletter:
  9. Dr. KSS:
  10. “most profitable energy company in the world”:
  11. now owns 52%:
  12. Pavel Durov, has fled the country:

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