FALLS CHURCH, Va.–There have been quite a few questions from concerned investors regarding the weak performance of certain SRI Portfolio recommendations. Two stocks in particular have been the focal point; an update is in order.

Gazprom has been a long-time favorite here and was added to the SRI Long-Term Holding Portfolio a year ago. The company is the largest natural gas company in the world by reserves and production. It fits very well with my view that energy is in a multi-year bull market and that Russia will play a pivotal role in the future as it develops its position as a global energy supplier. Nevertheless, the stock is down around 10 percent since I first recommended it.

Oddly enough, one of the main reasons for the stock’s underperformance is its size (14 percent of the Russian index) and liquidity. In other words, investors have sold Gazprom as an easy way to reduce exposure in Russia, take profits or use the proceeds in order to buy into the countless initial public offerings that took place in Russia this year.

There are some stock-specific concerns, but there are also some positives. For starters, the company recently said that its export revenue this year could be below last year’s. According to the Industry and Energy Ministry, in the first four months of 2007, Gazprom’s non-CIS countries’ (i.e., former Soviet republics) exported volumes dropped by 21.7 percent year-over-year to 46.8 billion cubic meters (bcm), while sales to the CIS fell 15.2 percent to 13.5 bcm from the previous year.

Nevertheless, given that gas prices are expected to rise this year–substantially in CIS countries–the company should see an increase in net export gas revenues (after export duties) to around 13 percent, reaching USD42.5 billion.

The stock was also hit when reports came out indicating that the Finance Ministry and Ministry of Economic Development and Trade suggested a big tax hike on domestic gas production. Although statements were issued afterward that such an increase isn’t imminent and will be much more moderate than initially thought, investment sentiment was hurt, especially in regard the short-term players. Furthermore, industry sources have indicated that the gas extraction tax wouldn’t be raised before 2010, at which time it’s expected to reach USD14.50 per million cubic meters.

In other Gazprom news, the company announced that its budgeted investment program (including acquisitions) will be USD30 billion for 2007. Until now, it’s spent around USD10 billion acquiring shares in exploration projects or ownership stakes in domestic and international energy companies. Given its huge cash flows and improvement in spending less money on noncore projects, Gazprom won’t have a problem achieving its goals while maintaining solid profit numbers.

As has I’ve mentioned before, the upcoming elections in Russia–especially the presidential one in March 2008–could be potentially disrupting for the markets. A lot of investors may want to see Vladimir Putin’s successor in office and get a feel for his policies before committing to the market.

This is a legitimate concern because Russian politics can offer many surprises. But the process–and most important, the transition of power–should be quite smooth relative to the country’s historic experience on the subject.

The secret, of course, is that President Putin controls the process and is expected to cut short any potentially damaging catfights among the frontrunners. If he’s successful, the country should enjoy a relatively stable election period that will translate positively to the markets and the Russian economy, especially if the new president doesn’t dramatically alter economic policies.

Of course, the usual rhetoric should be expected in an election year–rhetoric that sometimes makes foreign investors uncomfortable. But this isn’t a uniquely Russian trait. Bashing China, for example, has become a national sport for politicians in Washington; someone else should always be blamed for the various shortcomings of political leadership.

Election periods have always provided opportunities for outrageous promises to be made and big words to be spoken, always to be forgotten once in office. This is a global phenomenon.

Furthermore, investors should be careful in separating reality from fiction and not depend in any one “authenticity” in order to get the facts correct. Two examples demonstrate how misinformation or plain phobia can be very costly indeed.

One is the legendary wrong predictions made by The Economist–the well-known authoritative weekly from England–back in 1998. To wit, Russia GDP will fall by 25 percent, inflation will shoot to 10,000 percent, and oil will go to USD5.

In regard to Russia, the story unfolded much differently, and although the authoritative weekly revised its numbers, it never–to the best of my knowledge–was able to give good advice on the Russia issue. Consequently, investors who followed its opinions missed out on one of the greatest opportunities in recent memory.

The second example has to do with the lectures of well-known investor Jimmy Rogers. He’s been warning of an upcoming Russian collapse since I can remember and advising against investing there. His main rationale for this is the corruption and other endemic drawbacks Russia has and has been quite slow in fixing.

There’s nothing wrong with this assessment. What’s mind boggling, though, is what usually follows–namely a strong recommendation to buy in China and Africa, where, as everyone knows, corruption and the like are totally absent. I leave the conclusions to you.

If I’ve gone on for too long on this issue, it’s because that political noise should be treated as such, especially when there’s no real threat for a big change in economic policy, as is the case in Russia right now. Consequently, although risks should always be kept in mind, avoiding the Russian market solely on the assumption that something will go terribly wrong on the political front doesn’t seem to be a good idea right now.

Turning to the narrower subject of the market, it’s a fact that the Russian market has been one of the best performers in the past six years, rising by 1,142 percent in USD terms. Consequently, it’s been having a weak year; it’s down around 5 percent. For comparison purposes, some of the hottest major markets in the past six years have produced (in USD terms) more-inferior results: Brazil (250 percent), India (380 percent) and, the less-corrupted one, China (136 percent).

As I’ve mentioned previously, the Russian market can correct 25 percent and still be in a major uptrend. I don’t anticipate that, although a general global market selloff or an exogenous shock could do the trick.

Be selective and try to buy good Russian assets at lower prices, which the current weakness in the market offers. This should be done with long-term investment in mind; the summer months shouldn’t produce a spectacular rally in Russia, but something could happen later in the year. Russia remains a buy, and the Fresh Money Buys list should be the guide for sector and stock allocation.

Melco PBL has been the most-disappointing pick this year, down 30 percent since I first recommended it. The investment case was made earlier in the year. (See SRI, 7 February 2007, Got Patacas?)

Following up on it, the company’s first major property, the Crown Macau, opened recently in Macau. But the stock has lost 20 percent of its value since then. The main reason was investors’ disappointment with the fact the property wasn’t functioning at 100 percent capacity. Only 26 high-rollers gaming tables started operations on the opening day, and a large number of hotel rooms still weren’t available to customers.

Nevertheless, the rest of the high-roller tables as well as the rooms should be operating within one month. By then, Crown Macau will have 80 high-roller tables, 142 mass-market tables, 550 slot machines and 216 hotel rooms and suites in operation.

The problem with that is the Crown Macau is positioning itself as a VIP property and is expected to go head-to-head with the Wynn Macau, the other luxury hotel in the area (600 rooms, 300 in the regular hotel tower and 300 in the VIP tower). As a result, revenues will be hit short term.

But according to reliable information from people who have visited the property, the Crown Macau is easily the best hotel/casino in terms of design, quality of amenities, etc., and is easily comparable to the Wynn in a lot of areas. Of course, what everyone wants to know is how profitable the property will be.

It’s too early to tell, but it seems that management has done a good job of accessing high-rollers and VIP treatment seekers. Initial figures indicate gross gambling revenues (GGR) per table of more than USD10,000, a good number; the Wynn Macau’s GGR per table is reportedly USD15, 369. Note that when the Wynn opened in September 2006, daily GGR per table for the month was USD9,236.

On a negative note related to one of the company’s other projects–construction of the mega casino City of Dreams, scheduled to open in 2009 (see SRI, 7 February 2007, Got Patacas?)–management has announced that the project is expected to go over budget by about USD500 million. The project’s new capital expenditure number is now USD2.5 billion.

Such problems should be expected when big projects like this are taking place in an area where construction is booming, material prices rise and labor shortages appear from time to time. Of course, if they become habits and start hurting the company’s potential, then the stock should be removed from portfolios.

Looking at the Macau statistics, casino revenue continues to increase. April numbers indicated a 40 percent growth year-over-year, reaching USD775 million. Visitor arrivals were up 19 percent in April, with 15 percent growth in mainland China visits. The expectations are for a good May, too; the numbers haven’t come out yet.

Obviously, time will be needed to properly assess the company’s operational prowess and see tangible results. This doesn’t mean I won’t follow and assess the progress made. Nevertheless, although the two companies that have formed the joint venture are established ones with a lot of expertise in the business, this still is a new venture that’s just started and has a couple of mega projects planned for the next two to three years.

That said, Melco PBL remains a buy. But as I indicated when I added the stock to the Alternative Holdings Portfolio, this should be viewed as a long-term, volatile investment.

As always, the buy recommendation is made in the context of the Fresh Money Buys list explained below. Investors who already own the stock should hold it and use periods of weakness to add gradually to positions.

The two Japanese banks I recommend, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group have also performed poorly (down around 10 percent) and will be examined in an upcoming SRI. Their weakness isn’t so much a stock-specific issue; rather, it reflects the slow process of lending increases and consumption that these big banks are involved in.

Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group remain buys, especially at current prices. I believe Japan is slowly turning around and will eventually surprise investors to the positive.

I see the glass as half full in regard to the country’s economic outlook in the sense that country is on the right road to sustainable strong economic performance, as well as economic structural change. It’s just going to take a little time.

Very few people want to talk about Japan these days, which may be one more indicator that opportunities can be found in places that the majority ignores. I’ll have more on the case for investing in Japan in a coming issue.

Fresh Money Buys

If you’d like to add to your positions in Portfolio recommendations or allocate new funds, focus on the following markets, in order (for both countries and sectors): South Korea, Hong Kong (real estate, publishing, infrastructure), India (pharmaceutical, banking), Malaysia, Russia (telecommunications, energy), Singapore (telecommunications, banking, industrial), Europe (pharmaceuticals, oil, industrials, communications equipment, media), Japan (industrials, banking), China (consumer, power, oil, water), Taiwan (telecommunications, technology) and Macau.