Trade Alert – A high risk/high reward trade on a Russian stock

Ego. Pride. Confidence. These are important traits for anybody, frankly. But they are also your enemy when it comes to trading, investing and analyzing stocks, markets, economies and anything else. I bring this up because I got a great Scuttle sent to me today where a Scutify.com member asked me about Yandex $YNDX.

naveenneogi

Posted … 2h ago @CodyWillard Cody, with your contrarian thoughts, don’t you think $YNDX “could” be a steal. I still remember your thoughts on Syria conflicts wherein we got some stocks at bargain. I would hope you do spend some time on $YNDX for the benefit of all of us. Tx.

And I’m here to tell you that I was happy to check my ego, my pride and my confidence in keeping up with stock news, markets and economies upon Naveen’s request and I immediately set to work this morning on doing some Revolution Investing on Yandex. And here’s where my best try at being totally objective about Yandex with my analysis took me.

Yandex’s profile explains, “Yandex N.V. operates an Internet search engine in Russia and internationally. The company offers a range of search, location-based, personalized, and mobile services that enable users to find information, and communicate and connect over the Internet from desktops and mobile devices; and localized homepages for specific geographic markets.”

First off, let me repeat what I’ve long stressed and found over the decades to be true — investing in your own country where you know the laws and have some faith in the markets and the numbers that publicly-traded companies report is hard enough. Staying on top of US-based companies and their place in global Revolution Investment trends is hard enough, no? I typically stray away from foreign-investments, especially “developing market” investments, and having seen most investors lose their shirts at some point in most developing markets cycles over the years, I continue to think it’s wise to keep most of your money invested in domestic companies.

But again, let’s check that premise at the door and see if there’s an opportunity, contrarian or otherwise, to make some money in Yandex.

The contrarian-esque concept to this trade is much like the concept I’ve espoused over the last five years of buying stocks whenever the markets freak out and panic about a geopolitical development. Naveen mentioned my thoughts on the Syria conflicts when I’d repeatedly advised taking advantage of the panic in the markets by buying good stocks that you already believed in but were being sold off in the broader markets’ sell-off.

Take a look at the broad panicky sell-off in the Russian Stock Market Index, the RTS. You can see where it crashed when Russia formally invaded and took over the Crimea region of the Ukraine region of the former southwestern region of the former USSR region of the Eurasia region over there east of the US where I feel comfortable investing. I write it that way to underscore how far away Yandex and Russia and the conflict in Ukraine is from us here in the US and for me here in Alto, NM where I am writing this.

At any rate, there’s clearly a panicky broader market sell-off in the Russian stock market index and Naveen is right to point out the potential opportunity for us.

Now let’s look at Yandex specifically with what’s called “Bottom up analysis” since we just finished what’s called “Top down analysis.” First off, notice that you can’t use Yahoo Finance’s Analyst Estimate page for YNDX, because it’s not converted back into US dollar figures. But, you can dig down into the actual numbers and see that Yandex has grown their revenue, in US dollars, to more than $1 billion in 2013 and that revenue number is growing about 30% per year.

With YNDX down 40% from its recent highs and not having bounced back nearly as much as the broader Russian stock markets have in the last couple weeks since their initial post-Crimea-takeover crash, its current market cap is $10 billion. Google, which is the leading US-comparable for Yandex, did $17 billion in the last four quarters of sales and that revenue number is growing about 10% per year. GOOG is near its all-time highs and has a market cap right now of $385 billion.

So that means we could buy the “riskier” stock Yandex at a 10x price to sales ratio as the company is growing 33% per year or we could buy Google at a 25x price to sales ratio as the company is growing 10% per year. The P/E difference is similar, as Yandex is trading right now at about 15x next year’s earnings estimates while Google’s trading at about 25x next year’s earnings estimates.

The upshot of all this analysis is that I am indeed willing to take a flyer on some Yandex here as I think the stock will show huge upside over the next few months regardless of what Russia and Ukraine and Nato and the rest of the geopolitical bodies who are causing the current opportunity in Yandex do with each other.

I’m opening up a position in some Yandex call options by bidding on some August call options with strike prices from $28 to $35. If the stock comes back to where it was pre-crisis and/or even is driven higher by strong fundamentals and earnings reports in the meantime, I’ll have big gains in this trade. And if the stock crashes from here or even just stagnates, I’ll likely lose most of any capital I put into these call options. By using call options with strikes near the current stock price, I’m essentially creating a virtual stop loss from the outset of the trade. That is, if I pay $3 for an August YNDX call option with a strike price of $31, that means I’ll have upside exposure as long as the stock is above $34 by next August and that I’d lose all of the capital in those options if the stock were to be below $31 and never get above that before next August. Since you are getting 100 shares for each call option, you’re able to use a small amount of capital to get full exposure to any upside over $34 a share.

But as always, since you’re using options and they have a finite expiration date, you could (and often will) lose all the money you put into an options trade.

And finally, if you’re note 100% confident in your ability to make an options trade or just aren’t comfortable doing so, you could buy a tiny amount of YNDX common stock and if the stock drops below $27 or so, just sell all of it and thereby try to limit any loss to a minimal 10% from here.