Back To The USSR… With A Vietnamese Accent

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

First, VimpelCom continues to grow by leaps and bounds. VimpelCom’s second-quarter revenue in Russia jumped 43%, while overall earnings jumped 53% to $1.72 billion — beating expectations of $1.68 billion. Net income rose an eye-popping 84% to $359 million, handily beating analysts’ forecasts of $324 million.

Usage of a variety of mobile voice and data services by VimpelCom’s existing customers is exploding and average revenue per user (ARPU) levels are up dramatically. In Russia, average revenue per user came in at $12.30 in second-quarter 2007 versus $10.90 in the previous quarter and $9.00 in the year-ago second quarter. These numbers should improve further as VimpelCom rolls out high margin 3G services across its core market.

Second, although 85% of its current customers are in Russia, VimpelCom is spreading its wings far and wide. In fact, VimpelCom expects that the bulk of its subscriber growth in the future will come primarily from CIS countries outside of Russia. In Kazakhstan, for example, VimpelCom ended the second quarter with 3.86 million customers, up 75%. In the Ukraine, VimpelCom now has 1.82 million customers, up from 473,000 a year earlier. Just this past year, VimpelCom also entered Uzbekistan, Tajikistan, Georgia and Armenia, which increased the population in the territories covered by the company’s license portfolio to 240 million.

Finally, in what might be the most exciting development, VimpelCom announced last week its intention to invest up to $1 billion in a GSM mobile network in Vietnam under the name of GTel Mobile. Although VimpelCom will only hold minority voting rights in the venture, it will be entitled to the majority of profits. Vietnam is one of the hottest- and fastest-growing markets in the developing world. With a growing population of approximately 85 million people and mobile penetration of approximately 32%, there is plenty of upside for the VimpelCom joint venture.

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Alfa Group, one of the controlling shareholders of VimpelCom, also has been eyeing wireless assets elsewhere in Southeast Asia. Indeed, Alfa Group recently bought a small wireless firm in Cambodia. Word among some analysts is that Alfa Group is planning to acquire wireless assets on its own and combine those with VimpelCom down the road.

For all of its terrific prospects, VimpelCom remains relatively inexpensive, trading at a forward P/E of 15.69. Its Price Earnings to Growth (PEG) ratio is only .79, making it a bargain for a company with its exceptional growth prospects.

So buy VimpelCom (VIP) at market today and place your stop at $19.00. VimpelCom reduced its share price for prospective investors by conducting a five-for-one stock split on Aug. 22. VimpelCom is a volatile stock, so we’re keeping our stops appropriately wide on this one. For even bigger potential upside, I recommend the January $26 calls (VIQAY.X).

PORTFOLIO UPDATE

POSCO (PKX) continues to power ahead, and it is now up 65.09% since our initial recommendation. Add in the handful of double- and triple-digit options gains we’ve recorded with POSCO, and this is emerging as one of more lucrative picks ever.

Our soft commodity bet Potash (POT) continues to flirt with the $90 level. It is up just over 30%.

Central European Distribution (CEDC) has soared 13.11% over the past three weeks, with options up 56.36%. Hold on to both for now. BHP Billiton (BHP) has also bounced solidly — 6.11% over the past two weeks, with the options up 64.71%.

Last week’s pick, DryShips Inc. (DRYS), dipped on the back of a fall in the Baltic Dry Index — a measure of global shipping rates on 40 shipping routes on a time charter and voyage basis. Not to worry. This a small set back for what can be a high octane/high volatility stock. I look for DryShips to bounce strongly over the next few weeks.

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Our bet that Week 36 was to be one of the single, worst-performing weeks of the year for equities was spot on. Sharp sell-offs in the market confirm that market skittishness is still weighing in stocks, even as the global megatrends that underlie our stock picks remain intact. With September the weakest month, let's hold off on moving back into the markets for now. Once we have the Fed rate decision next week, we will have a clearer view of how to move ahead.

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