2,000 Subscriber Special: Central and Eastern Europe Fund $CEE vs. MSCI Poland ETF $EPOL

Nothing But Gratitude

Special thanks to everyone who has helped me to get this far. Ben Kelleran

Kontrarian Korner

, Ben Demase

The ROI Club

, and

John Polomny

for having me as guests on their podcasts. Special thanks to Tommy Deepwater and everyone who restacked and retweeted my writeups. I am grateful for all the help I can get.

As a marketing experiment, I will give away an annual paid subscription to a random free subscriber who restacks this writeup on Substack, and another annual paid subscription to a random free subscriber who retweets this writeup on Twitter. I will use a random number generator and declare the winners at 11:00pm Eastern Standard Time on December 5th, 2024.

I have been trying to find undervalued small cap stocks that fit along four major themes recently:

1. The Revenge of the Old Economy (commodity super cycle)(sustained inflation)

2. The Revenge of Cathie Wood (small cap tech)

3. Rotation to Consumer Discretionary

4. Fund Flows reverse to International

For a longer discussion, please take a look at my pinned writeup.

I might be a couple of years early on the reversal of fund flows to international markets, but if a business is cheap and growing, I don’t mind waiting a bit for the multiple rerating. Of all the countries that are trading below their 20 year average price to earnings ratio, I think Poland is one of the most exciting.

Not only in Poland’s stock market 1.6 standard deviations below the 20 year average price to earnings ratio, but GDP per capita in Poland has compounded at 7.8% for the last 34 years, rising from $1,731 per person in 1990 to $22,113 today. That GDP per capita is even higher in purchasing power parity terms, and there is still plenty of catch up growth left to go before Poland reaches the same income as Western Europe. Not only that, but Poland has dismissed the EU’s push for green energy, and has been happy to operate their grid on cheap coal to fuel their economic development. Can you even imagine living through a period where real incomes rise 18% in a year?

But after sifting through the Warsaw stock exchange, I wasn’t quite ready to exchange some dollars for zloty and dive into the great unknown. I know this might sound like heresy to my fellow stock pickers, but when I am confronted with a competency cliff, I don’t mind paying an active manager to choose the stocks for me, if they are adding more value than their fees. If you want to pick single Polish stocks on the Warsaw exchange, check out

Stonks Value

, that’s been an area of focus for him.

As for me, behold, The Central and Eastern Europe Fund (CEE), a closed-end fund that trades on the NYSE and is 69% Polish, 19% Hungarian, and the rest of the weights are too small to matter.

For those of you who are new to closed-end funds, they are an interesting vehicle. Unlike a mutual fund, the amount invested is fixed, investors can’t withdraw money, instead the shares are sold on the open market. This means that the closed-end fund can trade at a premium or a discount to the market price of the components. As of yesterday, CEE was trading 1.62% above the net asset value of the publicly traded components. Closed-end funds also focus on paying out large dividends, so if you live in a jurisdiction which has withholdings on US dividend income, this might not be the most efficient vehicle.

For those of you who are fee averse, closed-end funds typically have the highest fees in the industry, and CEE sits at 1.71% annual expense ratio. I know the zeitgeist today is to invest in things that have the lowest possible expense ratio, ETFs. And there is a time and place for ETFs, and if that is your cup of tea, you can always buy the iShares MSCI Poland ETF (EPOL).

There is some overlap in holdings, for example, PKO Bank Polski is 15% of EPOL, but only 4.6% of CEE. I like $16 billion market cap banks appreciating at 3.2% (not including dividends) as much as the next guy, but I prefer my undervalued small caps better.

CEE has some exposure to Develia S.A., a Polish real estate developer that trades at a price to earnings ratio of 7, and has a stock price that has appreciated at a 13.7% annual rate for the last 10 years while paying a hearty dividend, 16% yield this year. But it appears to be too small for EPOL.

The same is true for Dom Development S.A., another real estate developer whose price has appreciated at a 14.3% annual rate, and the dividend paid was just as hearty. Or Mo-BRUK S.A., a waste management company with a stock price that has compounded at a 35.4% annual rate for the last ten years, all while paying a modest dividend. None of which are members of EPOL. I could go on, but the juiciest small cap stocks in Poland are better represented in CEE than EPOL. For a country that is so far out of my competence, I’m happy to pay the higher expense ratio to have someone else listening to those earnings calls.

When something is mispriced, I always have to ask myself why. For Poland, there is an 800 pound gorilla in the room named Russia. Ever since the start of the Ukraine war, Western propaganda had insisted that Putin would invade Poland next, and it was imperative that we stop him in Ukraine to prevent the domino effect. I think reasonable people have to be able to see through that sort of nonsense. There is a buffer between Poland and Russia named Belarus, but there is no buffer between Ukraine and Russia, Ukraine was the buffer. I don’t want to spend too long discussing it, I will quickly get accused of being a Russian asset. But I believe that not only is the threat of Russia invading Poland greatly exaggerated, but that Trump wants to solidify his legacy in history by being the great dealmaker, and we are likely to see an end to the Ukraine war very early on in the Trump administration. That should provide some relief for the Polish stock market, which had seen a nice bump on the election results, but has since given back those gains as our Lame Duck in Chief seems hell bent on starting World War III.

So there it is, two ways to get exposure to one of the world’s fastest growing economies that is trading below historical multiples, and you don’t even have to figure out how to get zloty in your brokerage account. An end to the Ukraine war would remove the domino effect fears, and there are good odds we could see an immediate multiple rerating within a few months. And even if we don’t see that rerating for a while, with the economy growing at over 7%, levered companies are growing at over 12% while paying dividends.

Once again, I am giving away a one year subscription to a random follower who restacks this, and another one year subscriptions to a random follower who retweets this. Thank you in advance for indulging me in this marketing experiment.

And for paying subscribers, CEE has a hidden asset: