Greece

On May 8th, 1945 the German government, agreed to unconditional surrender. The German surrender ended World War II in Europe. Germany had been devastated over the six years of war. Entire German cities had been obliterated due to allied bombing raids. The Russian Army overran Eastern Germany, eager to take revenge for the suffering endured under brutal German occupation. Millions of refugees fled as the Russian army drove into East Prussia. Additionally, a large chunk of Eastern Germany was cut off and given to Poland.

The future looked bleak. Russia occupied the (new) Eastern half of Germany. Britain, France and the USA occupied the Western half. Many were hesitant to see Germany rebuilt at all, and possibly wage another world war. France was utterly opposed to restarting German industrial production.

The country officially reopened its stock market, the Frankfurt Stock Exchange, in 1949. Who would be crazy enough to invest in a country divided and decimated? Additionally, the country was the border of the new cold war between the USA and Russia. It would be ground zero for any conflict.

The insane people who invested had a very nice return on their portfolio. German stocks were down approximately 90% during WWII. However, from 1949-1959, the market returned 4,094%, compared to U.S. equities return of 426% during the same time period  (The Wages of Destruction, Tooze, Adam).

What does this have to do with Greece? Greece is a country with a very uncertain future. Will they leave the Euro? Who will win the election? What will happen in Europe next that could impact the Greek economy? Many pundits are trying to predict what will happen, but the truth is no one knows.

What we do know is that Greek stocks are extremely cheap on a quantitative basis. The market has dumped stocks as a result of the awful economy of the past few years. The valuations are now extremely low and could be the opportunity of a lifetime.

Below are some numbers from Morgan Stanley (NYSE:MS).

Greek stocks valuation

A look at the numbers shows that the price earnings ratio currently is 6.3.

The number is depressed due to the economy completely tanking. In late 2009, the PE for the S&P 500 was 87.

Yet that number is incredibly cheap compared to the rest of Europe. Furthermore, Morgan Stanley models Greek stocks to have a 2014 estimated EV/EBITDA of 2014. Numbers for free cash flow are 20x, price over sales 0.36, price over book 3.5.

Morgan Stanley considers Greek stocks fairly valued. MS assumes EPS growth of 34% in 2013, and 17% in 2014. The model projects 0.6% EBITDA growth per annum over the next three years. If anything goes right for Greece, the numbers should be far higher.

Morgan Stanley growth projections by european country

European country valuations

 

It is possible the stock market is trading at 3x, 2x or even 1x 2014 earnings.

On every metric, this is cheaper than the U.S. stock market has ever been going back to 1870. Furthermore, this is the overall stock market. Investors can purchase the Global X Funds (ETF:GREK), which tracks the 20 largest companies in Greece. Investors might consider individual names, which are even cheaper than the market average.

Greece is in a much better situation than Germany post-WWII. They did not just lose a world war and they are not under foreign occupation. And they did not just lose eight million lives, approximately 10% of the population.

Some will argue that Germany had the benefit of the Marshall Plan to help the economy. However, Greece has received plenty of money from the IMF and EU. Furthermore, if they show real attempts at economic reform they could receive more money. Germany also paid out over 90 billion deutschmarks as reparations between 1953-1992  (The Wages of Destruction, Tooze, Adam).

The country still remains a popular tourist site, being the 16th most visited in the world. If Greece adopts the Drachma and the currency is cheap, expect a lot of tourism. Greece has a large shipping industry. The country is strategically located in the Mediterranean. Despite the country being in a recession for several years, GDP per capita is number 32 in the world, just two places behind South Korea.

Greece was not always known as a “lazy country” (which itself is not accurate). The economy had rapid growth until the past few years. Between 1960 and 1973, the Greek economy grew by an average of 7.7%. Even under the Euro, The Greek economy was growing rapidly. Annual growth from 2001-2007 was over 4%.

The economy clearly can boom again, and this would be a big catalyst for Greek stocks. Greek stocks could repeat performance of post-war German equities.

(Disclosure: Long GREK for clients account I manage.)