cheap companies with good cash reserves

The Russian market is trying to recover from the panic attack. Sanctions, geopolitics and the expectation of escalation keep stocks in limbo. But even in such conditions, there are companies that can be taken with minimal risk.

What happens if the business closes

The basic valuation of companies most often comes from the size of their net profit or revenue, sometimes (if it is a telecom or IT sector) from the amount of cash flow or subscriber base.

But it happens, as it is now, that any clear guidelines are completely knocked down on the market: entire industries are falling, the economy is shrinking, reports are late. And then the assessment of the balance sheet comes to the aid of the investor.

P/B ratio (capitalization / balance sheet) shows how much the company is currently receiving on the market relative to its balance sheet assets (the value of buildings, factories, pipes, equipment).

In fact, this is the minimum business valuation that answers the question of what the investor will receive if the company whose shares he holds is liquidated, its property is sold, and the money is divided between creditors and shareholders.

A reference example of a low-risk company based on its P/B size is FGC. Its capitalization is several times less than the total cost of networks and stations. In the event of a hypothetical liquidation of FGC, investors can expect hundreds of percent compensation.

How much money do they have in reserve

Another criterion that helps to choose stocks during a crisis is the size of the company’s liquid cushion. The larger the business, the larger the financial reserve should be, therefore, for comparison, they take the ratio of liquidity and liabilities.

There are two key ratios that help you find companies that are most protected from cash gaps and non-payment crises. That is, from the situation in which, for example, the Russian economy was in the 1990s.

– current liquidity

This is a stock of short-term assets (including stocks in warehouses) divided by the amount of current (up to a year) liabilities: to banks, investors, suppliers, tax authorities.

– urgent liquidity

This is a more stringent indicator that correlates only free funds (money in accounts) and all the same current liabilities: loans, coupons, payments for supplies, taxes.

Among liquid Russian stocks, Surgutneftegaz has the highest liquidity ratios — about 5 annual liabilities. With such a reserve, a company can completely stop production and still pay the bills for several years.

What else is worth considering

In sum, low P / B (the company is cheap) and high liquidity ratios (there is a financial reserve) bring to the top such enterprises that carry the minimum systemic risk.

It is worth looking first of all at those that can have understandable drivers for growth. For example, the possibility for future mergers or expectation of dividends. This is exactly what a liquidity cushion is for.

Systemic importance to the economy is another factor in favor of the company and its stock. For example, the demand for fuel and energy will remain in any state of the economy: open, closed, mobilization.

At the same time, it is worth screening out issuers that have not updated their reports for a long time. The book value of companies changes little even for a whole year, however, those with more recent data are in priority.

Stock selection example

Below is a table of more than 10 companies whose capitalization is below the size of the balance sheet, and the liquidity cushion covers expenses for a year or more. Mostly it is the oil industry and the electric power industry.

Transneft, Inter RAO, FGC are in the most uncertain situation – there have been no reports for almost a year. These papers can now be taken only with a long-range view from the consideration that their entire industry rests on them, and nothing will happen to them.

The clearest picture is for LUKOIL, Unipro and Ashinsky Metallurgical Plant, which reported for the second quarter, respectively, their multiples and ratios are as close to reality as possible.

The dividend factor plays into the treasury of LUKOIL. There is money for this. Unipro is also interesting – in connection with a possible change of ownership. Ashinsky Metzavod is a less obvious choice: shares have been accelerating for two years in a row, but only those who buy them know why.

In the electricity sector, you can pay attention to Mosenergo and TGK-1. These subsidiaries of Gazprom have a decent liquidity reserve (up to 3 times the liabilities), while they are five times cheaper than their book value, and they have a long dividend history.


– There are companies on the market that will keep their business even under worst-case scenarios.

– When there is little fresh data, you can focus on the ratio of capitalization and assets on the balance sheet (P/B multiple).

– In crisis scenarios, enterprises of basic industries with a large stock of liquid assets (cash, fuel, transport) are of particular value.

– About a dozen Russian issuers fall under the described criteria, including those that managed to show a balance after the events of February this year.

– At least four companies worth mentioning based on four factors (cheap, sustainable, significant for their industry and not without drivers):

• LUKOIL (Buy. Goal for the year: 6700 rubles. / +67%)
• Unipro (Buy. Goal for the year: 2.5 rubles. / +118%)
• Mosenergo
• TGK-1

BCS World of Investments


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.