“The Greatest Trade Ever” An optimist’s guide to profiting from Armageddon (Motley Fool)

by Travis Johnson, Stock Gumshoe | April 8, 2010 11:36 am

The Motley Fool[1]’s international investing newsletter, Global Gains, has been talking up Greece quite a bit of late — and they just sent an editorial team to Athens to scope out some investing opportunities. Naturally, they’d like you to subscribe to the newsletter and find out what they think the opportunities are for profiting from this “armageddon” … but they also throw a couple teases our way, so let’s take a look and see what we can figure out on our own.

Tim Hanson[2] is helming this newsletter now, succeeding Bill Mann[3] (I like Bill’s writing and found and his work at Global Gains and Hidden Gems[4] in years past compelling, but he’s off running the Fool’s new Independence Fund mutual fund now (launching an expensive invest-anywhere fund right now seems a bit anachronistic, and odd for folks who have tended to eschew most pricey managed funds, but we’ll see). And most recently they’ve been largely focused on emerging markets, with high profile trips to China[5] and India[6] to research and pick stocks (including Dr. Reddy’s, which they’ve also been teasing recently as an Indian generic drug pick). But today, we’re looking at more of a submerging than an emerging market in Greece.

The tease is part of their “Final Dispatch” from the trip to Greece, and it builds on two of John Paulson[7]’s big trades of recent years — I won’t laboriously copy and paste all the details, but Hanson essentially tells us that Paulson’s reputed “greatest trade” was that huge bet against subprime mortgages that made him billions in 2007 … and that the trade that’s arguably more important for us was when he swooped back in and started buying up beaten-down bank stocks.

He relates this to his own trip — recounting that he went to Greece with the idea of finding ideas for ways to profit from the collapse, betting against Greek stocks in some way to emulate Paulson’s huge bet against the mortgage bubble, but then, after a week in the country, deciding that there was more opportunity on the long side. He and his team talked to investment bankers and other sources and learned about the “smart money” that was looking for beaten-down stuff to buy, and he heard tales about the protests being overblown, and the confidence of the Greeks that they would find a way to muddle through with their austerity programs and the help (eventually) of someone, probably Germany and the EU, reluctant as those big brothers may be.

The letter includes some other references to big investors who made their name betting against a bleak outlook, including the late Sir John Templeton[8], who famously bought up every cheap stock in NY on the eve of World War Two, betting that the world as we know it would not end.

Here’s how Hanson puts it for Greece:

“I was surprised to discover that a second quiet consensus was building in Athens. Namely, that should the situation worsen, the EU would eventually step up with a lifeline.

“(True to form, even as we were en route home it was announced that the EU would in fact provide support if needed. Though the market’s been slow to catch up — which makes the opportunity I’m about to share with you even more time sensitive.)

“Every bit as important, in place of economic malfeasance and widespread panic, we found a determined population quietly committed to what must seem a radical new austerity plan… and a sound strategy for finding a solution within the European framework.

“To make a long story short, while we are still bearish on the euro[9], instead of following the ‘window dressing’ institutional herd into crowded ‘Armageddon’ short ideas, we returned from Greece with some very attractive LONG opportunities.”

Ah, so there’s the rub … what, in fact, are those opportunities? He doesn’t get into too much detail, but let’s see what we can suss out. He tells us that he has three trades, let’s look at ’em in order …

“My first ‘Armageddon’ Trade — and the most conservative — is a simple ‘pairs’-style trade involving the shares of one of the world’s great cash-generating, high-margin businesses and a reasonably priced exchange-traded fund (ETF) you can buy from your broker today.

“With this one simple trade you can execute today, you can position yourself to claim your share of the massive profits of one of Europe’s — and the world’s — top global business franchises — while simultaneously profiting from the short-term weakness I foresee in the embattled euro.”

OK, so to profit from the “embattled euro” there are a couple easy ETFs you can buy, probably the simplest one is the double short ProShares UltraShort Euro Trust (EUO) since that seems to trade with the most volume — this is designed to move up twice as fast as the Euro moves down (or, of course, vice versa — if the euro goes back up against the dollar, this will go down twice as quickly). Market Vectors has a similar ETF, ticker DRR, but it trades in significantly lower volume and from a quick look at the chart they seem to be working identically (which is good).

The long half of this pairs trade is not nearly as obvious — top franchise, high margin, cash-generating could describe a lot of businesses, and absent any other inputs for the Thinkolator on this one I’ll have to go with one that seems relatively appealing to me, Coca Cola Hellenic Bottling Co. (CCH). Coca Cola Hellenic is headquartered in Athens, but is not serving just Greek customers — they are the largest bottler and distributor of Coke products in Europe and reach into 28 countries, from Italy east to Russia[10], and from Greece north to the baltic states (and throw in Ireland), and you get exposure to essentially all of “developing and emerging” Europe. This is a big company, market cap near $10 billion, and forecast to have a profit for next year that gives them a PE of about 13. Not cheap, and not particularly beaten down by the Greek crisis, but arguably inexpensive compared to peers.

And as I said, based on the limited clues this one’s pretty much a wild guess. Still, if you think folks in Europe, particularly the eastern half, will keep drinking Coke, the company will probably perform quite well — and if you think they’ll do well as the Euro falls you could make that bet as well.

So how about the next one?

“My second ‘Armageddon’ Trade is a slightly more aggressive wager on one of Greece’s most lucrative private/public ventures. Essentially a government-mandated monopoly in a recession-proof, cash-rich industry, this ‘favorite son’ was unfairly punished by a one-two punch of the debt crisis and black market competition.

“And WE are setting up to be the beneficiaries. A massive annual dividend and temporarily depressed valuation position us for 15% annual gains — and quite realistically MUCH more once the Greek economy picks up. Again, I explain everything in my new report.”

For this, again we don’t get enough to be definitive — but if you’re talking about recession-proof and cash-rich, for me that narrows it down (from the available and reasonably trade-able ADRs and pink sheets stocks of Greek companies) to either the big telecom Hellenic Telecommunications (OTE) or the sports betting and lottery company Greek Organization of Football Prognostics (GOFPY for the 2:1 ADR on the pink sheets). Throwing in that it’s facing black market competition, and that leans me toward the gamblers (the biggest competition for any legal lottery or casino is the illegal bookmaker). OPAP, as they call themselves (I can’t type out the Greek characters, sorry), is the numerical and sports betting company in Greece, with exclusive rights to handle sports betting and numerical odds lotteries — I didn’t delve into the specifics about how that differs from the other lotteries or Keno games that are also operated by licensed companies or by the government itself. The government is also a part owner of OPAP, and was a majority owner when it was founded — they’ve gradually sold off shares and I think now own less than a third of the company, with those holdings another potential thing that could be sold off to raise money for the state as they continue to move forward with privatization plans in several industries.

OPAP does also pay a large annual dividend, though the dividend was 20% lower for 2009 than for 2008 (as profits were also down roughly 19% for the year, on a relatively minor revenue drop of 1.5%). The final dividend for 2009 was 1.75 euros, which at the current exchange rate would be about $2.33, and halve it for the 2:1 ADR so that’s a dividend of about $1.16 on a share price of $10.90 on the pink sheets (which itself is a bit of a price premium to the trading on European exchanges, though not usually a huge one), and you get a yield of right around 10.5%. Indeed large, I have no idea whether Greece will toss a withholding tax at you or anything like that, but it’s a big payout, and they seem to be looking at ways to expand their business in cooperation with the government (crushing illegal gambling[11], adding scratch tickets and online betting, etc.). I would want to dig into the business deeper before getting too excited, but it is an interesting, cash-rich company with a business that seems to be resilient (sales down only 1.5% last year, and expected to stay weak, but still very profitable). Their investor relations page is here if you’d like to start researching it yourself.[12]

And again, just to reiterate: these are limited clues, and I’m largely guessing this time.

Which brings us to the #1 Armageddon Trade … drumroll, please!

“My final and No. 1 “Armageddon” Trade is a pure-play John Paulson-esque value grab perfect for risk-tolerant, long-term investors looking for “hedge fund”-style rewards. At the epicenter of the current crisis, this well-run, rock-solid institution is, in fact, priced for Armageddon.

“How else could you expect to get a dominant national leader… and one of the continent’s most-respected brands… at nearly 60% off its recent highs? And this despite the fact that nearly half the company’s business is in markets outside the country.

“Again, this trade is not necessarily for the beginner, but it’s a textbook (though exceedingly rare) opportunity to profit from a knee-jerk investor reaction. In short, a strong balance sheet and leading franchises both inside and beyond Greece’s borders make this one a screaming bargain at today’s beaten-down, “end of the word” prices.”

Hoodat? I think we must be looking here at National Bank of Greece (NBG) — all of the Greek banks have been clobbered, but the shares of this one are down about 56% from the October high of $8.37, and this is one of the more visible Greek investments that’s easily traded for Americans — the other being OTE, probably, (here I’m assuming that we just ignore the many Greek shipping companies, since most of the public ones have little to do with the Greek economy). NBG looks like a bargain basement pick right now, for very good reason — their core business looks fine from a cursory glance at their latest report, but banks are heavily reliant on the value of their assets, and a large amount of the assets of the bank are in Greek sovereign debt. So if the value of those bonds falls, as it has been, or the spread increases for Greek bonds versus comparable German bunds, as it has, the worries increase about NBG.

I’m not a banking analyst and I certainly don’t want to steer you wrong, but this one does look like an interesting bottom-feeding speculation in a multinational bank — there is certainly some concern about their deposits, according to this article from earlier today[13], but they are also very exposed to Turkey after their acquisition of Finansbank a few years back, and they have a lot of business throughout southeastern Europe thanks to other investments in banks in Bulgaria, Serbia, and many more neighboring countries, so they don’t rely exclusively on Greek deposits. The situation is obviously very fluid, and there seems to be some significant question about how banks will be treating Greek debt under EU rules[14], but the ECB and the IMF both seem to be surprised when investors are skeptical — from how I read things, they’ve been pretty clear that there will be a rescue if needed, but not until it’s really needed.

The biggest hangup for investors in all Greek stocks is uncertainty, which often means that any real “rescue” details that hammer out exactly what will happen should drive the stock prices higher. Unless, of course, there really is no rescue, the government defaults, riots spread and we all stuff our Drachmas in the sock drawer. For what it’s worth, I’m most interested in OTE among the stocks I noted above, though I must admit that there’s some Gumshoe temptation to dig further into the Football Prognostics and NBG for some possible speculation, especially if the shares continue to fall — after all, you don’t get to be John Paulson (or Aristotle Onassis, for that matter) without betting against the crowd.

Have some pent-up feelings about Greece that you’d like to share, or a favorite Hellenic stock? Want to speculate on whether Greece or California needs to be rescued first? Let us know with a comment below.

And if you’ve subscribed to the Motley Fool’s Global Gains service, please review it for your fellow investors by clicking here[15]. Thanks!

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