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James Berman

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The Antisocial Valuation: Facebook vs. Greece

Posted: 05/22/2012 12:34 pm

As a contrarian investor, I'm used to putting money where others wouldn't -- and holding off in places where others would.

But there could be no greater divide in sentiment than the purchase I made on Friday while the rest of the world was watching Facebook (FB). I bought a Greek company. Before you call the attendants to whisk me away to Bellevue, just hear me out.

Not buying the Facebook IPO was an easy one. For one, I don't buy IPOs. Why buy something on non-negotiable terms and price that the informed seller has handpicked -- and at the time of the seller's choosing? IPOs are rigged to go up, to give some credence to the "greater fool theory" whereby flippers flip to those who feel they in turn can flip. But if you're a value investor as I am, you never buy something overpriced on the hope that a greater fool will buy it even more overpriced. It just isn't good business.

In this particular case, I was offered pre-IPO FB shares. I probably wouldn't have bought them anyway, but they came with a six-month lock-up. That's a deal killer when you're talking about something overpriced to begin with.

Facebook, by the way, is a great company. It's essentially the most widely distributed software-as-a-service, where the service is virtual socializing. I'm not one who feels they won't monetize it. They already have. I'm not one who feels it's a fad. If it's a fad, it's the most successful fad 900 million users have ever seen. I'm not one who feels it won't reach the market cap heights of Google and more; $300 or $400 billion would be nothing for this company if it delivers.

I stayed away for one reason only -- the only reason that should ever matter: the expected return doesn't match the expected risk.

Even if Facebook were to reach a trillion-dollar price by 2020, that would only be a 33 percent annualized return. Anyone would give anything for a 33 percent return, but remember: that's if Facebook reaches the $1 trillion mark, an unprecedented value, double that of Apple. To do it, every single thing must go right, and nothing can go wrong -- and no new kid billionaire-entrepreneur can appear on the block.

Could this happen? Of course. But the more likely scenario is 20 percent per year on the back of mammoth risk. Not worth it.

That brings me back to my Greek company, to be named shortly. Facebook is the locus of maximum optimism -- where, I would argue, such optimism is already priced in. Greece is the point of maximum pessimism, where the market is down 90 percent from peak and capital flight is the disorder of the day. The entire market cap of the Greek market is only $18 billion, a mere "over-allotment" in FB's IPO. As a result, the bargains are incredible. Finding a company to buy is harder. But one multinational sells a product you'll recognize, one that can even give FB a run for the money, and so I bought it in the fund I manage.

The "little Greek company that could" is Coca-Cola Hellenic (CCH), a $6 billion market cap company (yes, a third of the entire Greek market) and the second-largest Coca-Cola bottler worldwide. They sell Coke to Greece but also to Italy, Austria, Switzerland, Poland, Hungary and Russia. The company is financially strong and gushes 504 million euros in free cash flow per year, a free-cash-flow yield of more than 10 percent (at the $16.06 per share price I bought it). Coca-Cola bottling is a proven business model, more so than Facebook. Should the euro disappear, Coke will not. It will still be mixed, bottled and sold in some denomination. Maybe Europe should switch to Coke as a currency. It would be a better store of value.

Coca-Cola bottling is not a great business: it's capital-intensive, with modest returns on capital. And demand for cola also sags in a depressed economy. Will CCH's returns even beat 15 percent annualized? Probably not, but at this valuation and sales growth of 5 to 7 percent a year, they have a good shot. Will they beat Facebook's future return? The idea looks laughable. On Friday, CCH was up 3 percent and FB was only up a few pennies, which doesn't mean a thing -- but was ironic nonetheless.

A Greek company in the deep end of the contrarian pool is my preferred choice. Not because it has better growth prospects. It doesn't. But it has one thing FB lacks: It's priced right for the risk.

 
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