This is a fictional tale of a heroic investor, perhaps from Ithaca, NY, who made risky investments into the best stocks that Greece had to offer. Note this is fiction, and Greece and its public companies could very well end up much different in reality.
"Tell me, oh muse, of that ingenious investor who traveled far and wide after he had secured his retirement with some fantastic long-term Greek stocks. Let us hear of how he navigated safely through the incredible economic mess of Greece to find riches."
The muse, not one for flowery language, answered, "Sure, let's look at just how bad the Greek economy was, and then what stocks were best positioned to recover..."
Part I: A long way back to Ithaca
It was 2012, and Greece was a member of the European Union, although it only accounted for 1.5% of total EU GDP. Still, like a small bag containing all the winds in the world, the economic consequences of relatively tiny Greece could easily spread across the entire continent. This was because while the EU was fantastic at adding countries, having grown from its original six to 27, it didn't have much practice in kicking countries out. This was especially true for the eurozone, the group of 17 countries intricately tied together with the euro currency.
Greece was seen as a sort of blueprint for future countries in trouble. Unfortunately, the other countries in trouble included Spain and Italy, about 5 and 8 times the size of Greece's economy, respectively. If Greece succumbed to the monster of debt, defaulted, and withdrew from the eurozone, it would set a dangerous precedent for the future of the economic union.
Given this, Greece seemed already sucked into a whirlpool of high debt and little, if any, growth. Unemployment was at an unimaginable 25%, even worse than one year ago, when it was at a still-staggering 18%. Unemployment for those between 15 and 24 was at a whopping 58%! As kids had a harder and harder time finding work, the more it seemed like a good idea to sail off to Troy -- to find a job.
Greek debt to GDP wasn't falling, either, because the GDP itself fell off so quickly. Its debt to GDP figure of 170% was forecasted to rise to 192% in 2014, instead of the previous expectation for it to near the International Monetary Fund's sustainable threshold of 120%. In 2013, things were expected to be just as rough, with a GDP contraction of over 4% forecasted. While the government attempted to shrink the budget, general strikes abounded that included public transit workers, railway workers, airport workers, doctors, lawyers, prosecutors, and municipal workers.
The European Central Bank and IMF, like intervening gods, gave Greece lifelines. In 2010, Greece received a $140 billion bailout loan, and in 2012, another $165 billion. Private creditors to Greece lost over 50% of their investments as the country renegotiated for lower interest rates on the remaining balances.
The entire situation could have ended up with Greece swallowed whole by the whirlpool, with little left at the end. If Greece fell out of the eurozone and was forced to use a new drachma, it would've been devalued anywhere between 50% and 70%, while euros in the country would have made every opportunity to flee with their owners, and the country would struggle to import what citizens needed.
Even in the face of all this trouble, our hero filled out and executed three perfect trades, stunning the other investors who had only selected value traps.
Part II: The strongest will survive
In 2012, Greece had a Shiller P/E ratio around 3, compared to that of America's S&P 500 (SNPINDEX:^GSPC), 21. While Greek's ASE index traded around 5,000 in 2008, it now sits below 1,000. These cheap valuations were either a siren song leading our hero to crash his portfolio, or a great opportunity. To mitigate a complete loss, our hero only set aside a small amount into some select stocks that he thought would perform well. Below are the equities he chose.
First, he took advantage of the broad diversification that an exchange-traded fund offered -- namely, the Global X FTSE Greece 20 (NYSEMKT:GREK). If Greece pulled through, such a fund offered the chance to easily invest across 20 Greek companies. This fund charged a net expense ratio of 0.69%, with its largest holdings being Coca-Cola Hellenic (UNKNOWN:CCH.DL) at 17% of holdings, the National Bank of Greece (UNKNOWN:NBG.DL) at 12%, and Hellenic Telecom (NASDAQOTH: HLTOY) at 9%.
Second, he looked at an industry relatively untouched: gambling. Specifically, he considered OPAP (NASDAQOTH:GOFPY), which only saw a revenue decline of 7.5% from 2011 to 2012, yet realized a higher profit margin -- nearing 13%. A profitable business in one of the worst economies gave reassurance to our hero that even if Greece didn't turn around, this company would likely still survive any dramatic events. The government itself actually owned 34% of the company, but it planned to sell part of its stake to raise money to fund itself.
Finally, he looked at Mytilineos Holdings (MYTIL.AT), miner of aluminum, zinc, and lead, as well as having a hand in energy and defense vehicles. While he wrote of the Greek-made defense vehicle business, that Mytilineos was able to remain profitable in the first half of 2012 made it a strong contender amid any macroeconomic situation. Revenues were flat and profits down, but not negative.
No guts, no glory
That is the tale of the heroic investor who bought a smattering of Greek stocks in one of the most dangerous times. His secret, however, is that it was not only the extremely risky Greek stocks that led to a successful retirement among family in Ithaca, NY.
Fool contributor Dan Newman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.