Sunday, April 12, 2015

Betting on the jockey. Speculating with Wilbur Ross on Bank of Cyprus

Cyprus is back in the news but I am sure many missed the significance of what was announced this week. The government is Cyprus lifted all the remaining capital controls that were imposed after the collapse of the banking sector and economy two years ago.


The last restrictions on international transfers will be lifted on April 6, Cyprus government spokesman Nikos Christodoulides said in an e-mailed statement to Bloomberg. Domestic capital controls ended in May 2014.

“The lifting of the restrictions confirms the full restoration of confidence in the banking system, the significantly improved business climate and essentially marks the return of the economy to normal conditions,” he said.

Cyprus is emerging from the crisis that forced it to seek a bailout and impose a levy on depositors two years ago while Greece, which in 2010 became the first country to be rescued by its euro-area partners, continues its tug-of-war with creditors.

I have been watching Cyprus for over a year as the stock market there was down 99%. Any market that is down 99% at least has to be looked at for the potential of a rebound. My typical thesis that countries very rarely just disappear came into play with Cyprus. I knew it was an opportunity but I had to find a vehicle to trade it and a catalyst that indicated that events were going from terrible to slightly less terrible. Change at the margin has now happened with the lifting of capital controls. This event was preceded earlier this year when Bank of Cyprus shares resumed trading in Cyprus and on the Athens stock exchange. 

The shares in the bank began trading after the bank was recapitalized by several large investors including US turnaround billionaire Wilbur Ross.  If you are not familiar with Ross's resume you can read Mr. Ross's Wikipedia page and see that he has been a guy that comes in and restructure bankrupt or distressed companies and industries. Following a serially successful investor into a situation like this is what is meant by "betting on the jockey, not the horse". Ross and the other investors bought stock in the Bank of Cyprus for .24 Euros per share late last year. The stock has recently dropped to around .20 Euros so buying now actually gets one in on Ross's coattails at a 20% discount to what he paid. 

Now this is a speculation and just because his other turnarounds worked out does not guarantee that this one will work out. However guys like this do not run diversified portfolios trying to beat the averages. They keep their powder dry until a fat pitch comes across the plate and then they swing with everything for grand slam home run. Here is Ross on his views on Cyprus:

So the situation is that the country got into big financial trouble. The banking system almost collapsed so the government had a bail in where some depositors assets were confiscated to save the bank. No one cares about Cyprus right now just as serially successful turnaround investors show up. The bank will not disappear and Cyprus will not disappear. Capital controls have been lifted and the economy should actually grow about .5% this year. The bank is now slowly but surely healing and at some point everyone will discover  how undervalued Cyprus is and the stock should revalue higher. That is my thesis. This is definitely a speculation and it will take a few years for this to play out. However this could be a multibagger. Do your own due diligence. 

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