Buying or holding National Bank of Greece ("NBG") common stock in either Greece [TICKER: ETE] or in the U.S. (NBG) at its current price is an extremely unwise decision an investor can make. The investment case for wanting to buy NBG is understandable at a high level, but investors are making three grave errors and may very well cost them significant money in the near future:
- Investors are confused by the actions of larger hedge funds who are investing in Greek banking stocks
- NBG is the most overvalued bank stock by almost any metric
- There is a simpler solution to benefit from a stronger NBG, with lesser risk and far greater upside
Often, when equity markets show great performance for a long period of time, as they largely have done since 2009, investors look to find ways to participate that might provide significant upside if the economic picture continues to improve. We have seen this dynamic many times this year in a number of stocks where momentum was the pure driver of the stock price. In May, the stocks of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) rose 393% and 358% respectively as the average retail investor mimicked famous hedge fund managers who publicly disclosed investments in these companies. What the average investor did not realize was that the hedge funds were largely buying the preferred shares of these entities (at substantial discounts to par value) and when the bubble popped on FNMA and FMCC, the stocks declined 58% and 57% respectively over 2 days.
A similar dynamic appears to be occurring with U.S. retail investors and day traders buying the common stock of NBG. As can be seen in the following chart, the price of the Greece common share trades in a reasonable manner throughout the Greek trading day, but rises significantly (nearly 10%) upon opening of the U.S. market (see 9:30 time on 7-Oct-13).
This indicates speculative trading by investors who are ignoring fundamentals. This is a pattern that has continued as can be seen in the following two charts (see 9:30 time on 18-Oct-13 and 21-Oct-13).
Day traders gravitate towards the NBG common stock because of liquidity and easy access, as it is traded in the U.S. However, keep in mind that Alpha Bank (OTCPK:ALBKY) also has an ADR that trades approximately three million shares per day and is likely a better bank and a better investment to play a Greek recovery through (as explained later).
Follow the Leader Again?
Why are investors so enamored with a Greek recovery? They are again following the lead of a few prominent hedge fund investors (such as John Paulson, Seth Klarman, David Einhorn, Mark Mobius, etc). These investors all have publicly stated that they have invested in a Greek recovery by buying into the recapitalized Greek Banks as shown in the following 2 articles:
So naturally, what do retail investors do? They follow the leader and buy shares that they believe will benefit from a recovery in Greece. Given that NBG is the most visible and liquid way for U.S investors to invest in Greece due to a liquid and actively traded ADR, NBG became the darling. Since October 1st, NBG stock is up 56% and the volume is 165% higher than it has been over previous 3 months.
Celebrity Investors are Playing a Different Game
Unfortunately the retail investors buying into NBG may not be making the right bet. The celebrity hedge fund managers had made their investments in Greek banks in a selective manner. In all cases, not one famous fund manager has mentioned National Bank of Greece as an investment they have made and for good reason. The hedge funds are actively invested in the other recapitalized banks of Greece, Piraeus Bank and Alpha Bank.
Why has the smart money avoided NBG?
The smart money has avoided NBG for a number of reasons:
- It is the most overvalued bank, not only in Greece, but as compared to other European banks and even the largest and most well-capitalized U.S. financials
- It is hardly even an investment on a Greek recovery
- There is a way to participate in the upside of National Bank of Greece without taking most of the downside risk associated with owning the common shares
Let us address these individually:
Bank Valuation: most commonly used metric for valuing a bank is its book value and in a lot of cases, investors would compare Price to Tangible Book Value. We will look at both as follows. NBG is clearly overvalued by these metrics. On a price to book value NBG is overvalued by 50-70% vs. the average valuation of its peers. On a price to tangible book value, it could be 100-200%.
Additionally, research analyst community has placed price targets on the stocks of NBG and others - NBG has materially overshot these price targets while the other banks still offer compelling value.
Country of Operations: The name National Bank of Greece can be quite misleading. While it is true that the bank has meaningful operations in Greece, over half of its revenue is generated outside Greece and greater than 100% of its profitability comes from Turkey along with a significant portion of its value.
With NBG, Turkey + Other accounts for 58% of revenue. Turkey is the only profitable region. Additionally, a large portion of NBG's value is attributed towards its Turkish operations, Finansbank AS. As Finansbank is publicly traded, we can see the market capitalization of €3.0 billion of which NBG owns 95%. This implies that Finansbank accounts for €2.9 billion of NBG's total valuation. Based on NBG's current market capitalization of €11.3 billion, the implied remaining value in NBG excluding the Turkish operations is then €8.4 billion. The implied price to tangible book value (calculated below) that investors will pay for the Greek operations (excluding Turkey) is a staggering 3.0x. Readers should be aware that most other peers trade around 1x book value. Imagine this premium being paid for a bank with borderline capital adequacy ratios and 25% non-performing debt ratio.
While Turkey can be an attractive market, a large portion of the value of NBG is contingent on Finansbank. Are investors really prepared to take on the meaningful risk associated with the Turkish operation as opposed to a Greek recovery? Are investors even aware that their play on a Greek recovery is not even all that Greek after all?
NBG Warrants: A Much Better Way to Invest in NBG
For those who would want to stay involved in NBG, the warrants are much more attractive as an investment than the ADR. These warrants participate in 100% of the upside for a fraction of the cost. As such, the amount of capital being risked by an investor who buys the warrants is a fraction of the loss possible for a common stock buyer.
Each warrant allows the investor to buy 8.23 shares of NBG. The strike price to exercise the warrant on December 27th is €4.37 ($6.02) which means the warrant holder can get all of the upside on any NBG price increases at a fraction of the cost. Currently, the warrant costs €1.80 ($2.48) which means you can buy an in-the-money call option for €0.22 ($0.30) a share. Why pay €4.70 ($6.47) for the shares when you can pay €0.22 ($0.30) for the same upside with the warrants?
See below the potential trade value on buying an equal dollar amount of warrants versus shares.
So what is going to happen?
Because the warrants are in-the-money for the December 2013 strike date, arbitragers will exercise the warrants to buy the shares at a discount to current market value. This will increase the amount of tradable shares on the market and may pressure the stock. Given the over valuation that is already present, the upside in NBG may very well be limited? For those who bet on further upside to be had, the warrants are a way better way to participate.
It is quite apparent why the prominent billionaire investors have not invested in NBG common stock. It is not only very overvalued, but it does not even offer the best way to play a Greek recovery. Also, do not be fooled by the chart - NBG issued 2.2 billion new shares in June and such dilution will mean it will be decades before it reaches anywhere near the previous highs seen in the past.
If your excuse for owning NBG common stock is that this is the only way you can logically invest in Greece, you should ask yourself if that is a sufficient way to approach investing. One could have said that multiple times over the past year. We remember in May when the same sentiment sent the stock up to $24. In fact, those who invested on that basis in May near the previous peak would be down 74% on their investment. So with regards to an investment in NBG common stock, we draw on two quotes from the most successful investor of our time, Warren Buffett:
- Be greedy when others are fearful and fearful when others are greedy
- The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch.
With NBG stock up 52% in the past 14 trading days, one needs to wonder if the crowd is currently greedy or fearful.
Disclosure: I am short NBG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I hold a short position in NBG and long the warrants