Summary My rough bottoms-up valuation of the GREK index reveals just fair overall valuation. Greek banks now represent less than 5% of the GREK, and I consider them a long-term call option costing me roughly 5% of the index. While the overall GREK index looks just fairly valued, the low median values reveal that there are many very cheap individual stocks. These stocks are cheap for a reason, such as high debt, falling sales and often energy sector dependence. The general theme of Greece has come out of the headlines recently. However, its banks were very much in the spotlight in the past weeks as their stocks crashed following the expected stock dilution and lukewarm interest from institutional investors to take part in the recapitalization. With the Greek banks’ bad news getting gradually priced in, I wanted to reexamine the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) index now and attempt to make a very rough bottoms-up valuation to see if there is an attractive investing opportunity. My analysis revealed several surprises and facts, which I would like to share with my readers now. Fact #1: There is very little downside risk in GREK from the Greek banks now With year-to-date returns of Alpha Bank ( OTCPK:ALBKY ), National Bank of Greece ( OTCPK:NBGGY ), Eurobank ( OTCPK:EGFEY ) and Piraeus Bank ( OTCPK:BPIRF ) up to negative 99%, the total weight of the Greek banks in GREK has been diminished to below 5%. This significantly reduces the risk of a large decline in GREK. The GREK options implied that volatility has fallen recently to reflect this lower downside risk. So I now consider the Greek banks as a call option that costs less than 5% of the GREK index and never expires. Not only is the banks’ weight on the index insignificant, but the banks are also usually valued using industry-specific valuation metrics. Valuing them using traditional broad market valuation metrics would just distort the entire picture. Due to these two facts, I decided to simply ignore the banks in the valuation and treat them as the 5% call option that never expires. So what exactly is GREK made of? Here is the list of the current top 25 holdings, representing the overwhelming majority of the total index value, sorted by their weights on the index. The holdings and their weights are updated as of December 17, 2015 and provided my Morningstar. (click to enlarge) Source: Morningstar, author’s recalculations Financial ratio metrics I recalculated the index weight values by summing up holdings of the same company in the form of its primary stock listing (usually listed in the Athens stock exchange) and its ADR form. Here is the updated list, which simplifies things and shows a clearer picture of the holdings, including the financial ratio metrics. (click to enlarge) Source: author’s calculations based on data from Bloomberg, Morningstar, Gurufocus, Yahoo finance and Finviz A quick warning on methodology Please bear in mind that some of the data was hard to get and calculate, and had to be obtained from several sources that may not be using a consistent methodology. While most data incorporates the third quarter 2015 numbers, which include the tough period of bank transaction limits, etc., some minor data was available for the June quarter only. Therefore, an error margin should be much wider than usual, at least plus and minus 20% in the valuation metrics. Otherwise, the valuation is very representative because it takes into account ~92% of the GREK index’s holdings, omitting just the ~5% attributed to the banks for the reasons described above, and also ignoring about 3% of GREK that comes from some below 1% positions. The total GREK metrics calculations are made using a weighted average, with the values being weighted by the stock’s index weight. Negative or N/A values are ignored, and the weights of the remaining valid values are increased proportionally to make up 100%. Surprising fact #2: the GREK index as a whole looks fully valued using most financial metrics The overall dividend yield for the trailing twelve months is just 1.25%, nothing to attract income investors (even if the other risks were ignored). Other metrics are not faring much better. Consider the following. Trailing-twelve-month P/E not very attractive The average trailing-twelve-month P/E of the GREK index is ~16.14x. This is roughly on par with the U.S. and many European or other indexes of economies that are in much better shape, with much more predictable future political and economic environment. So this is a big disappointment, but in times of economic distress, P/E’s may be abnormally high or low as they near bottoms. Some commodity and energy-related GREK stocks are arguably at a deep through of the current cycle. The negative P/Es were ignored, so the calculation takes into account ~86.50% of the total index; the 10% of the index has negative earnings, and the remaining 5% are the banks. The high P/E for the two largest constituents, which are not very cyclical and represent ~40% of GREK, are not very enticing. On the other hand, if we look at the more important cash earnings, the P/FCF figures for these two largest stocks are much lower and arguably quite attractive. Trailing-twelve-month Price/free cash flow is more attractive than the TTM P/E The weighted average TTM P/FCF came in at ~13.31x. This is not bad at all given what Greece and their companies have had to go through in the past twelve months, though the largest constituent, Coca Cola HBC ( OTC:CCHBF ), is predominantly export-oriented. Nevertheless, investors can buy many companies outside of Greece with even lower P/FCF ratios and arguably similar or better prospects or at least less political and economic risk, such as even Apple (NASDAQ: AAPL ), or International Business Machines (NYSE: IBM ), or Xerox (NYSE: XRX ). The P/FCF calculation includes ~85% of the index weight. About 10% of the index has negative FCF, and the remaining 5% are the banks, which were excluded. The forward P/E is even a bit worse than the TTM P/E The weighted average forward P/E currently stands at ~16.94x, as represented by just ~54% of the index. The rest of the constituents either don’t provide forward guidance or I was not able to obtain one. So the forward P/E is less representative but not very attractive nonetheless and carries a higher risk of ending significantly off the mark as many factors are either unpredictable or not factored in the guidance. The Price-to-sales and price-to-book is similar to other markets and not very attractive The weighted average P/S came in at ~1.40x and the P/B is ~1.60x. This is nothing out of the normal range typical for other markets and doesn’t really entice much buying when so many markets with similar valuations are available to international investors. However, some companies within the average show very attractively low P/S and P/B values, indicating distress but also potential attractive deep value plays for patient investors. These include the energy sector stocks, such as Motor Oil (Hellas) Corinth Refineries SA ( OTCPK:MOHCY ), Hellenic petroleum SA (ATH:ELPE), and Public Power Corporation of Greece ( OTCPK:PUPOF ), as well as others such as Ellaktor SA ( OTCPK:ELLKY ). However, many of them carry relatively high debt and other risks. The important fact #3: Using EV/EBIT and EV/EBITDA, GREK trades at about half the S&P 500 valuation The average EV/EBIT stands at ~11.6x and is calculated using 85% of the index. The remaining 10% has negative enterprise value or negative EV/EBIT and was ignored, as were the banks. The average EV/EBITDA is ~5.7x and was derived from ~88% of the stocks weight, with ~7% being EV/EBITDA negative or having negative enterprise value, with the banks being excluded again. For a comparison, the aggregate S&P 500 EV/EBITDA currently stands at around 10x while the median value is around 11x and is arguably overvalued as a group. The GREK index trades at about a half of the EV valuation of the S&P 500. In other words, GREK would have to DOUBLE in order to trade at the same valuation as the S&P 500. And EV metrics for some individual GREK stocks are even more attractive. For example, Coca Cola HBG trades at just ~3.5x EV/EBIT and 2.29 EV/EBITDA thanks to its high debt leverage. The most important fact #4: while overall GREK valuation looks full, the mean averages are much lower, signaling plenty of individual stock opportunities in GREK While mean valuations for the U.S. indexes are mostly higher than the weighted average, in GREK, the opposite is true. There are many stocks cheaper than the overall index. In other words, while the U.S. S&P index valuation masks how expensive many of its individual stocks are, the GREK index’s seemingly unattractive overall valuation hides many undervalued stocks beneath the surface. For example, the median P/B is just 0.91, below 1x, signaling clear distress in parts of the index, especially the energy. I believe it is worth it for investors to go through the individual Greek stocks and pick the best spots rather than buy the overall index, which in itself is only fairly priced and future returns will be just average in my opinion (5% to 10% per year with high political and economic risk). Several GREK individual stock ideas for further research 1. Coca Cola HBC While the company trades at a seemingly high P/E and forward P/E, the cash metric, trailing P/FCF is sitting at just ~11x. 3.5x EV/EBIT and 2.29 EV/EBITDA are very low as well. The problem, of course, is the relatively high debt/capital ratio as well as other potential risks that need to be analyzed in more detail before buying. 2. Several other companies There are many companies trading at very attractive valuation metrics, and their individual risk profiles and future outlooks have to be carefully examined before jumping in. These include Athens Water Supply & Sewerage ( OTCPK:AHWSF ), Folli Follie ( OTCPK:FLLIY ), and Greek Organisation of Football Prognostics ( OTCPK:GOFPY ). 3. Many energy-related bargains, mostly carrying higher risk Metka SA trades at just ~6x P/E. However, it is FCF negative. As an engineering contractor, it has been negatively impacted by the energy sector weakness. However, the 2.28x EV/EBIT and 1.45x EV/EBITDA look very cheap if the company manages to survive through the downcycle. There are also several companies trading at depressed valuations due to being closely tied to falling energy prices, such as Public Power Corporation of Greece , Motor Oil (Hellas) Corinth Refineries , and Hellenic petroleum (ATH:ELPE) and Ellaktor , which trade at rock-bottom P/S ratios but carry mostly very high risk due to low commodity prices and high debt. Risks Besides the specific risks in the individual stocks, such as debt and falling sales and margins, the GREK and its constituents are prone to very high political and economic risks that may include higher taxes, price controls, and even an outright nationalization or semi-permanent strikes, revolutions, and boycotts of local sales by the local population. Conclusion While the overall GREK index does not look cheap given all the extra risks involved with Greece, the low median valuations reveal that there are many individual companies in the index that are attractively priced. However, they also carry individual risks such as high debt and more. Some individual stocks worth further investigation include Coca Cola HBG, Metka, Athens Water Supply & Sewerage, Folli Follie, and Greek Organisation of Football Prognostics. There are also several energy-related companies trading at distressed P/S ratios carrying high debt and cyclical risk. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.