How To 'Putin-Proof' Your Portfolio

By StreetAuthority | April 11, 2014 AAA

In one classic "Seinfeld" episode, Kramer and Newman are embroiled in an epic game of Risk -- in which they actually carry the board with them everywhere.

#-ad_banner-#In one scene they're playing it on the subway. As Kramer rolls the dice, he threatens Newman: "Ukraine is weak!" A Ukrainian national overhears Kramer's taunt, and things go hilariously south.

Although it's no laughing matter, I pictured Russian leader Vladimir Putin delivering Kramer's line as he decided to annex Crimea. All kidding aside, the tensions in Russia have the potential to create some of the most substantial geopolitical risk investors have seen in a decade.

Markets are nervously awaiting Putin's next moves. Aside from the obvious risk to Russia-themed exchange-traded funds (ETFs) -- such as iShares MSCI Russia Capped Index Fund (NYSE: ERUS) or the Market Vectors Russia ETF (NYSE: RSX), both of which are off more than 20% this year -- many widely held multinationals have substantial downside risk due to large Russian exposure.

Exxon Mobil (NYSE: XOM)
Exxon.jpgThis oil supermajor is developing a Siberian drilling project worth a reported potential $500 billion in revenue. Naturally, if conditions worsen, this venture's future will be jeopardized.
JPMorgan Chase (NYSE: JPM)
ChaseBank.jpgThe bank's presence in Russia means it's currently exposed to about $7 billion in loans. Bad things happen when nation-states become isolated. Their economies go sour. Currencies get weird. Worst of all, in JPM's case, they stop paying their bills, especially to foreign bankers.​
PepsiCo (NYSE: PEP)

Pepsi.jpgWith $4.8 billion in annual sales, the soft drink and snack giant is officially the largest food and beverage company in Russia. Pepsi was the first taste of Western decadence to make it behind the Iron Curtain in the late 1970s, and being first has definitely given the company the upper hand. However, the franchise is threatened by the hint of any isolation.

Ford (NYSE: F)
Ford.jpgCurrently, the automaker is three years into a joint venture with Russian car builder Sollers, with annual sales volume of 130,000-plus. The economic turmoil in Russia since the beginning of the Crimean annexation and the fear of pending sanctions has put a noticeable dent in sales and spurred layoffs recently.
McDonald's (NYSE: MCD)
iStock_000017001883_ExtraSmall.jpg With over 400 stores in Russia and nearly 75 in Ukraine, the world's favorite fast-food chain continues to invest in developing markets. However, economic sanctions could damage this product as well as turning consumer sentiment against the company. National sentiment is much thicker than special sauce.

Now, will the exposure these companies have ruin them? Absolutely not. But their commitments and involvement are relatively high-profile. Therefore, the market tends to punish those first when things get shaky.

It's hard to own the stock of just about any large multinational company without having at least some exposure to the BRIC nations. Here are a handful of high-quality stocks for which that exposure is somewhat more limited compared with the stocks named above.

ConocoPhillips (NYSE: COP)
Conoco.jpgHaving spun off its refinery unit, Phillips 66 (NYSE: PSX), this top-shelf oil company now focuses on and invests purely in exploration and production. Active in developing the viability of Canadian tar sands, ConocoPhillips currently boasts 8.6 billion barrels equivalent in proven oil reserves. The majority are in accessible, politically stable areas. No assets are in Russia or any nearby former Soviet republics.

At $71.50, the stock yields 3.9%, has a forward P/E of 11.5 and is one of the more attractively valued large oil companies.

Coca-Cola (NYSE: KO)
2CocaCola.jpgPepsi getting the jump on the Real Thing before glasnost may not have been a bad thing altogether.

​While Coke does have a presence in Russia, Pepsi does have greater market share. That's OK. Currently, Coke's 25%-plus share of the global soft drink market outstrips Pepsi's 11.5%. The stock's valuation is compelling. Trading at close to $39, a 10% discount to its 52-week high, it has a forward price-to-earnings (P/E) ratio over just over 18 and pays a 3.1% dividend yield.

Typically, the 18 P/E is a little high for my standard. But the earnings quality and bondlike consistency of the company can command what seems like a modest premium.

Intel (Nasdaq: INTC)
2Intel.jpgThe world's largest microchip maker has some money at work in Russia through sales and distribution as well as its investment arm, Intel Capital. However, that represents a little more than $150 million altogether -- very small considering the company's $20 billion mountain of cash and equivalents. Internationally, Intel's main driver is developing Asia, and there is still plenty of room for the mobile device chip business in the Americas to grow as well.

​At around $27 with a dividend yield of 3.3% and a forward P/E of 14.5, the stock is an excellent value, thanks to its 80% share of the global computer processor, low debt-to-capitalization ratio of 18% and 10-year average return on equity of 20%,

Risks to Consider: As with anything, I could be completely wrong. Things could cool down, and deep-value Russian stocks could become the buy of the decade. I'm not recommending selling stocks that have a good deal of Russian exposure. Should things settle down, the stocks I discussed above should continue to perform well. However, another consideration is the Crimean crisis spilling over to other former Soviet satellites.

Action to Take --> It always pays to mitigate risk and be vigilant. A basket holding COP, KO and INTC has a median forward P/E of 14.6 and a blended yield of 3.4%. With modest P/E expansion to 17, the basket could achieve a comfortable total return of 20% with less volatility.

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