GREK: Looking for Value in the Rubble

Posted: Jan 20, 2016 12:01 AM
GREK: Looking for Value in the Rubble

Sometimes no news is good news. In the case of Greece, that is probably doubly true. For a good part of last year the big story was how the basket case economy of Greece was going over the cliff as fears ran high that Greece would have to abandon the euro. Confounding most expectations, the left wing government in Athens got its act together and started undertaking the tough measures necessary to reform its economy.

Nonetheless, the one exchange traded fund dedicated to Greece has continued to make new lows. Back on March 9, 2014 the Greece 20 ETF peaked at 25.13. It collapsed to around 10 at the peak of the Grexit drama, and since then has meandered all the way down to 6.91 as of yesterday’s close. At these depressed levels, adding this ETF to your portfolio could pay off with above average returns long term.

Now, Greece is far from being out of the woods. The Greek economy is no longer in freefall.

But the EU estimates that in 2015 the economy contracted 1.4% and 2016 will see another contraction of 1.3% in 2016 before returning to growth in 2017 of 2.7%. And Greece’s debt to GDP levels are still unhealthily high. But sometimes the time to buy is when the crowd doesn’t see the upside potential, and Greek assets are by many measures exceptionally cheap.

GREK is an odd grab bag of assets. About 18% of its portfolio is actually a Swiss blue chip, Coca Cola Hellenic. Despite its name, CCH operates across most of Eastern Europe, with Greece being a relatively small part of its business. And beverage bottling is traditionally an exceptionally steady business; even in the worst of economic times people keep drinking Coke.

Another major holding is Hellenic Telecom (OTE), accounting for about 13% of the fund. OTE is the dominant telecommunications provider in Greece, and it also owns a majority stake in Telecom Romania. Phone services are another relatively steady business, and OTE has remained profitable throughout the Greek economic crisis.

So one third of the portfolio is actually quite stable, which should limit the downside risk of this ETF. It’s the more purely Greek remainder of the assets that are truly high risk but that could fuel truly high returns if and when the Greek economy finally recovers from its recent malaise.

Here you are getting exposure to Greece’s decimated banking sector. National Bank of Greece was once one of GREK’s biggest holdings, but NBG’ equity holders have been essentially wiped out in a recapitalization of the bank. Greece’s fourth biggest bank Alpha Bank has fared much better by comparison. After its own recapitalization, its stock is down a mere 98% from its highs. It comprises about 13% of the portfolio.

Alpha is trading for a third of its tangible book value. Legendary distressed investor Wilbur Ross invested heavily in Alpha at much higher prices, betting on a long term recovery in Greek banking assets. In a recent interview, he is still bullish, and estimates that the bank’s battered assets will return astonishing 20% internal rate of return. GREK also has a 5% exposure to Piraues Bank, now Greece’s largest bank (by assets).

The rest of the portfolio is a smorgasbord including Greece’s national electric company, real estate companies, industrials and consumer products.

So GREK is largely a bet on an eventual economic recovery, particularly for a banking system that was recently on the brink of collapse. It is also a bet on Greek lawmakers continuing to enact the necessary legislation to reform Greece’s notoriously inefficient economic system and tax regime. Many of the most politically difficult measures have already been passed.

But there are obviously still plenty of risks investing in Greece. For example, the highly regarded CEO of Piraues Bank was just forced into resigning by the Greek government, a troubling sign of political interference. But if you’re willing to take a long term perspective, sooner or later Greece will return to investors’ attention. And buying before that happens could yield patient investors outsized gains.