Macro Outlook: The new Iron Curtain will be more expensive than the old one…
The sanctions imposed on Russia are inflationary. They will disrupt availability of certain food items, spare parts, electronics, and household items. Many of the missing products will be procured from outside of the US/Western Europe at higher prices from third parties or intermediaries. Import substitution would be a logical, but capital-intensive response.
The Government’s reaction to sanctions was predictable: capital controls. Introduced as a temporary measure, capital controls could stay in place for a long time (bureaucrats like to control). Subsidies and tax incentives for the affected sectors of Russian economy should follow and produce desired results over time.
It seems to me that the Russian Government keeps moving towards the Chinese economic model, with some elements of central planning, industrial policies, large SOEs, high levels of defense spending, managed currency, state-controlled media, social control, and the rest… We can expect more of the same, regardless of the outcome of the conflict in Ukraine.
As we are monitoring the confrontation in Ukraine, we should think of what happens if Ukraine agrees to all Russian demands. For example, Russian officials keep talking about “denazification” of Ukraine. It is not clear to me what they have in mind. The original denazification was done by the Allied Powers in Germany (1945 - 1950). It involved screening/vetting of large groups of people to make sure that former Nazis do not end up in the new government. The present case is of course very different, and I think that the use of internment camps will be avoided…
A couple of inexpensive stocks:
Ashtead (AHT LSE). Ashtead is providing construction equipment rentals primarily in the US under the Sunbelt Rentals brand. A similar US-listed company is United Rentals (URI). Both stocks a relatively volatile cyclicals, with betas over 1.5. The equipment rental business is very healthy and can be expected to stay that way for some time. Current shortages of equipment are favorable to large rental fleet operators, because they can get new construction equipment ahead of smaller purchasers.
I like AHT better than URI because of the company’s focus on acquisitions. I think that AHT, being a large operator, can grow market share by acquiring smaller companies at a fair price. The rental business is very local, and higher market share should translate into better pricing. The company is financially leveraged, having Net Debt/EBITDA of 1.9x, and BBB- rating from by S&P. I do not expect the company to develop credit problems at this stage of the capex/construction cycle.
EBAY (EBAY NASDAQ) is a well-established e-commerce platform. Growth expectations for the company are low, and the stock is inexpensive, trading on 12x forward PE, and 7% Free Cash Flow Yield. The company is pursuing many growth initiatives: focus on high-growth categories, focus on more profitable customers, product authentication, interface simplification, video content for listings, advertising services to sellers, better control of payment flows, to name a few. I think that these strategies have a good chance to work, and the company’s guidance for better growth in 2H 2022 can be realized and possibly exceeded. The company will offer more detail on the long-term strategy at the Investor Day on 3/10/22.