The Ukraine 'Peace Trade'

Which stock is better, EVRAZ or Polymetal International PLC?

Today the Kremlin announced the terms on which they would negotiate a settlement on Ukraine. Many of us thought that Moscow would want to divide the country in half and maintain control of the East. The terms that the Kremlin are floating fall far short of that.

This invasion has been horrendous. We have now seen what modern advanced munitions can do when deployed. Let us all hope that we are now starting the process of negotiations and that the Ukrainian people can get back to their normal lives.

Throughout the conflict two stocks have started to shape up as being the ‘peace trade’: EVRAZ and Polymetal International PLC. Both are traded on the FTSE and both are as English in their genetics as they are Russian. In what follows, I will just lay out an overview on how these stocks have behaved before and during the war.

The chart below shows how the stocks have performed since the invasion started on the 24th of February.

So, as of today, Polymetal has fallen somewhat further than EVRAZ. What accounts for this? It could be the relative financials. Below are the P/E ratios and dividend yields for both companies and also for the FTSE.

On this basis, EVRAZ looks more attractive than Polymetal. Yet when both are compared to the FTSE, it is clear that both are extremely attractive on a pure financials basis.

Here’s the thing though. Polymetal has a pretty stable stock price until the invasion started on the 24th February. But EVRAZ had already been experiencing some turmoil as early as the start of the new year. This was because EVRAZ announced a demerger of its coal assets in mid-December and investors were fretting about whether they could maintain their enormous dividend. The uncertainty in early and mid-February surrounding a potential invasion seemed to be exacerbating declines in EVRAZ’s stock price, while Polymetal stayed bouyant. Fear compounds on fear, it seems.

When we pull back and compare the two stocks since the new year we see a strange fact emerge: the market seems to have simply priced Polymetal off of EVRAZ despite the fact EVRAZ had seen price declines that were due to changes in its business operations.

When we look at the correlations between the two companies this becomes readily apparent.

Mr Market did not see any relationship between EVRAZ and Polymetal until the 24th of February. Then the invasion happened and Mr Market effectively said: “Hmm, I think I will price Polymetal exactly in line with EVRAZ”.

So, which is the better stock for a peace trade? EVRAZ has better financials. But it also has the additional risk from the demerger announced in December. On the other hand, Polymetal does not have quite as good financials. But it also does not have any additional risks (that I know of) and seems to be being arbitrarily priced based on EVRAZ’s current market price.

I would therefore lean toward Polymetal being a slightly better ‘pure’ peace trade. But throw in diversification considerations and you’re probably best off buying both — maybe weighting Polymetal slightly heavier due to the above considerations.

Of course, all that said, I have no insight into whether peace talks are coming. Nor do I have any insight into whether the UK government would move to ban ownership in these stocks. This is a very high risk investment — with potential for very high reward. But if I have to tell you that, you probably shouldn’t be reading this.