We love Turkey: A trip to paradise where stocks double
Burton Flynn and Ivan Nechunaev
May 2024
Fishing for marlin in Bosphorus
In the last 12 months, all four of our portfolio companies from Turkey saw their stock price more than double. And in the last 10 years, our fund recorded a dozen instances when a Turkish company's stock more than doubled in the first 12 months after we invested, representing nearly a third of all such doublers in the fund. These Turkish gems have greatly contributed to our fund's current #1 rank for both 5 and 10 years out of all 1,500 EM funds listed on Bloomberg. This is why we love Turkey, the multibagger paradise it is.
Despite all the macro noise – a constant feature when it comes to Turkey which we negate with currency hedging akin to using noise-cancellation headphones – Borsa Istanbul, the country's stock exchange, keeps on giving a lot of success stories to us. The main reason is because it has a lot of cheap, growing, high-quality small-cap stocks: a huge, deep and very liquid (pun intended) sea of opportunity to fish in for bottom-up investors like us searching for overlooked and misunderstood companies.
Speaking of fishing, on Borsa Istanbul there's always a marlin lurking behind a bunch of hamsi, waiting for the most astute fisherman to wake up at dawn, detect its barely visible sharp fin, catch it gently with a masterful stroke of a lasso, and then ride along with it in tandem like Hemingway's heroic old man at thrilling speeds for hundreds of miles in a persistent northward direction across the stormy sea for as long as the sun is shining. One big difference from Hemingway is that in our book both the marlin and the fisherman grow stronger during such a voyage and make everyone at home very happy upon their triumphant healthy return.
We made a trip to Turkey and met with the CEOs of three portfolio companies whose stock prices have more than doubled in the last 12 months (in fact, all three more than tripled). We also paid a visit to the almighty Borsa Istanbul – the sacred temple of doublers, as well as met with the CEO of a publicly listed local investment banking boutique at the forefront of foreign investor flows into the Turkish market. We then ventured outside of Turkey for in-person due diligence of southern European assets of the world's largest cruise port operator – our fourth portfolio company in Turkey which was another doubler in the last 12 months.
We are ringing the bell at Borsa Istanbul!
People are strange
We flew from Helsinki (where it was snowing in -2°C) to Istanbul (where it was sunny in +25°C) on a fully booked flight of a publicly listed low-cost Turkish airline which proudly claims to have the lowest CASK (cost per available seat kilometer) in the world. We enjoyed the food on board: those kofte meatballs this airline serves are always so delicious! The famous emerging markets investor and pundit Mark Mobius likes to share a story how he convinced Turkey's flag carrier to hire a renowned chef from Vienna to improve food quality; while we are not aware of this low-coster hiring any acclaimed Viennese chefs, our taste buds are very happily tickled every time we fly with it nonetheless.
Upon landing in Istanbul right before a spectacular sunset, we immediately noticed the logo of a publicly listed Turkish airport services provider which has recently expanded to India. At the airport, we bought SIM cards from a publicly listed Turkish mobile operator offering high-speed 5G internet. And as we rode to our hotel through the beautiful streets of Istanbul, we counted 50 or so publicly listed Turkish companies’ logos coming out of the darkness of a pleasant warm evening like fireflies: from auto dealerships to banks, from grocery stores to brokerages, from insurers to biscuit makers, from diversified holdings to mattress sellers, from electronics manufacturers to granite producers, from children's stores to luxury leather goods exporters...
One might think we are strange – and we well may be: we laughed that we are probably the only people who arrive in a foreign country and have fun recognizing dozens of that country's stocks on every corner, many of which we have researched and owned before. Clearly, Istanbul with its hundreds of public companies is the best place in emerging markets for us to unleash our skills in this stock-picking game.
Arriving in Istanbul from Helsinki with a Turkish publicly listed low-cost airline
You'll never guess the world's 4th most visited city!
Our van driver shared with us that his upcoming summer season is already shaping up to be "very-very good" thanks to many more tourist bookings compared to last year. The concierge at the hotel where we stayed expressed similar sentiment, with rooms for the peak season being booked much earlier this year. We also heard from one of our contacts on the ground that some large seaside resorts in Antalya are reporting 30% higher summer demand year-on-year.
The number of passengers on the international flights of the low-cost airline with which we flew to Istanbul has grown over 30% higher this year so far, compared to last year. And a local publicly listed airport operator recently upgraded its earnings guidance on the back of exceptionally strong international arrivals in Q1 which also numbered nearly 30% higher versus a year ago. This company has Antalya airport in its portfolio, and – would you ever guess this to be the case? – Antalya was the 4th most visited city in the world in 2023 (even Guy Ritchie, the British filmmaker, has recently frequented Antalya, having already made two movies in the city)! Equally impressive is Istanbul’s #1 spot in that most visited cities ranking.
It appears to us that this summer the flights are going to be full, the airport shops sold out, the taxis unavailable, and the hotels crowded. Well, even we have booked all-inclusive family vacations in Turkey's south this spring – way to give back to the market that's been giving us so many doublers! – and our hotel’s receptionist also said that this year will be much busier and the season may get extended beyond October due to overwhelming demand from European tourists.
All of this serves as a promising leading indicator for Turkey's tourism sector and broader economy this year – Istanbul and Antalya might welcome even more visitors! Of course, it is a big positive for some companies: not only airlines, airport operators or hospitality providers, but also those that sell Samsonite bags much beloved by foreign visitors. Hint: there's only one such publicly listed company, and it's the first portfolio company we met on this trip.
Two cities from Turkey made the top-5 in the 2023 world’s most visited cities ranking. 2024 is shaping up even better.
Making Italians cry
Our first portfolio company meeting on this trip was with the chairman and CEO of a $250m leather goods manufacturer – one of the top-10 all-time best performers in the fund – which makes luxury bags for iconic western fashion houses, exclusively sells Samsonite products in Turkey, and operates dozens of retail stores under its own brand. Last year, the company opened a factory in Italy (which we had visited for due diligence as first external guests ever) to make luxury goods with a coveted label "Made in Italy''; this Italian factory has been a huge success so far, with a prime lineup of global luxury brands knocking on its door and asking for collaboration, impressed by the company's stellar longstanding reputation for trust, quality, and efficiency.
We were astonished to learn from the CEO that he makes his new permanent hires at the Italian factory cry. We were relieved when he explained that they cry tears of happiness upon learning that they have landed a well-paying job in their home province where a lot of people are looking for work but there are very few work opportunities – a dynamic that helps the company easily attract the best local talent (the ratio of applications per job at the factory competes with Ivy League colleges’ admission rates). At the same time, the company’s competitors from other Italian provinces with high historical concentration of leather makers suffer labor shortages and payroll cost increases as they fight over a limited pool of workers that keeps shrinking due to urbanization and low birth rates (Italy's birth rate of 1.2 children per woman is one of the lowest in the world, and now there are more people aged 80+ than children aged 10 or younger in the country).
As part of our due diligence, on this trip in our classic fashion we made unannounced visits in tourist-like attire to the company’s branded retail stores in the busiest part of Istanbul as well as its Samsonite stores in both domestic and international terminals at the Istanbul Airport – and we were fully satisfied with the friendliness of staff and quality of goods. Having enjoyed for the last two years carrying all around the world our black bags made by this company (the best and longest due diligence possible!), on this trip we diversified our Turkish bag portfolio and got ourselves a pair of new – this time brown – bags made by the company from sustainable Norwegian leather. We couldn't be happier with their design and quality, which in our view easily compete with those of luxury Italian bags (which are made by this Turkish firm anyway).
The company prospers in any economic environment thanks to its high-quality diversified business portfolio, bold business moves, and sizable cash position in hard currency. With Italian operations ramping up, upcoming tourism season in Turkey looking highly promising, local inflation showing early signs of decline, and Turkish lira exhibiting early signs of stabilization, we are optimistic about the firm's continued growth in both short and long term. In our meeting, we were once again impressed by the strategic vision of the management of this 52-year old family business with the founding father now serving as the chairman and his son as the CEO.
Meeting with the chairman (father) and the CEO (son) of a $250m Turkish luxury leather goods manufacturer (12x P/E; 2023 earnings growth +152%; last 12 months stock price increase +228%)
Escorting tech businesses to success
Our second portfolio company meeting on this trip was with the CEO of a $150m technology firm which manages a portfolio of 60 most promising Turkish start-ups. Turkey has many young people with high-quality technical education who start a lot of new tech businesses, but it lacks sufficient capital willing to help them get off the ground, and this company fills the funding gap by providing early-stage investment – entering at very attractive valuations. The business has been performing exceptionally well, its earnings having more than doubled in each of the last three years. We estimate that the company’s earnings will keep doubling for at least the next couple of years thanks to appreciation in the value of the company's successful startups.
One such startup from Istanbul, for example, is developing a glaucoma treatment technology and has already secured two patents in the US – while a lot of startups out there claim to have applied for patents and put "patent pending" in their shiny presentations trying to lure investors, this one actually did receive real patents and has produced treatment evidence in scientific studies; its valuation has gone up from $2.5m at the end of 2022 to $50m now. Another startup, an AI-assisted battery research and development firm from Izmir which develops ultra-high energy density cathode materials for electric vehicle batteries with low cobalt and high nickel composition, has recently signed a multimillion-dollar technology know-how export contract with a US partner and is now worth $12m, its valuation having increased 33x in the last 3.5 years.
The company was started over three decades ago as a computer trading business and many investors in Turkey still think of it as a "computer company". The CEO – who 20 years ago was dubbed the "Bill Gates of Turkey" – has been patiently explaining to investors that while the company's name hasn't changed, its business nature has. Some investors ask him why he doesn't have 40 people on the team: he is confident that having the current team size of 7 professionals is beneficial to his firm's investment results as it allows for quicker, more flexible and more independent decision making. We share the CEO's view on the advantages of small teams and believe that our team size of two investment advisors and a research analyst has also served us well – as evidenced by our fund's performance. Like this company's CEO, we avoid layers upon layers of investment committees, portfolio managers and analysts which destroy originality of thinking and dampen speed of decision making, and go where others don't (the CEO is a very rare breed of technology investor in Turkey that invests in early-stage startups).
We met at a beautiful modern restaurant atop a boutique hotel overlooking the Bosphorus and the iconic Galata Tower built over 500 years ago by the Genoese colonists that called Istanbul home. The hotel building was restored several years ago from a dilapidated state through the CEO's personal efforts out of his love for Istanbul. We appreciated the menu at the restaurant and the walls at the reception explaining the building’s history, and on our next visit to Istanbul we surely would like to stay at this hotel – and eat at this restaurant again.
Meeting with the CEO of a $150m Turkish technology investment company (10x P/E; 2022 earnings growth +319%; LTM stock price increase +330%)
Beefing up the backlog
Our third portfolio company meeting on this trip was with the CEO and CFO of a $200m electrical and renewable energy services firm which is one of our top-10 all-time best performers: the fund invested in this company three times in the last 10 years, and on each occasion its stock price more than doubled in the first 12 months! The management of the business is very entrepreneurial, never settles for status quo, and is always exploring ways to grow.
The company's main business division – electrical contracting – has been doing exceptionally well: it has bagged several large projects in the past year, as a result of which its backlog expanded by about 250%. This record-high backlog – the easiest leading indicator for profits to interpret by an investor – translates into record-high earnings in the next 12-24 months. Given that many of this company's competitors went out of business in the recent years, it can be very selective which projects to bid for and at what price levels, it can demand larger client payments upfront thus reducing the collection risk, and it makes sure that over 80% of its contracts is fixed in EUR terms – a great help given that the notorious Turkish lira is known for frequent bouts of depreciation.
The company is also making strides in its new electric vehicle charging business: it hired an engineering team, made an EV charger prototype, and is preparing to start manufacturing and selling EV chargers by the end of the year. Recently, it acquired a 15% stake in Turkey's best EV charging ecosystem startup, with an option to increase the stake further. The management is very happy about this acquisition which should not only grow a lot in value as an investment but also provide the company access to dozens of EV market participants just as it plans to start selling its chargers.
Our office meeting gradually turned into a business lunch meat-ing where while continuing to grill the management on their business strategy we also binged on grilled şaşlık and other meaty delicacies as well as the local dairy drink ayran, the impact of consuming which we sharply felt on our way to the next meeting when our biological clocks started acting as if it were already midnight and our digestive systems demanded that we take solid naps to work through our protein backlog which probably expanded by about 250%.
Meeting with the CEO and CFO of a $200m Turkish electrical contractor and EV charger manufacturer (10x P/E; 2023 earnings growth +83%; LTM stock price increase +259%)
Foreigners are welcome
Our last company meeting on this trip was with the founder CEO of a $100m diversified investment banking firm. In addition to being Turkey's M&A and IPO champion, this company is also a broker of choice for foreign investors, has a quickly expanding wealth management division, and is an active player in the non-performing loan (NPL) sector.
The firm stands to benefit from the Turkish finance minister’s economic normalization policy that seeks to reduce inflation and stabilize local currency after years of unorthodoxy in monetary and fiscal policy which resulted in triple-digit inflation and lowest real interest rates in the world. If executed properly, the new economic agenda can both stimulate M&A activity locally and attract foreign investment flows into Turkey, handing a double win to the company – given that it services both domestic and foreign investment activity – after years of challenging local M&A environment and lack of sizable foreign investor flows. While in the past the share of international investor ownership on the Istanbul stock exchange was 65%, now it sits at a mere 35% (are we at the bottom yet?).
The CEO was satisfied with the measures the country's finance minister and central bank governor are taking to bring the economy back to stability, and is seeing first-hand a growing interest in the Turkish market by large institutional foreign investors from New York and London which have been frequent guests at Turkey-focused events abroad showcasing the country's focus on economic prosperity in a favorable political environment with no major elections in the next few years.
Meeting with the CEO of a $100m Turkish investment banking firm
As we were leaving the company's office, we saw a mesmerizing statue of a nomad man we had already seen on our prior visits. It reminded us of our essence as emerging markets investors traveling the globe in search of hidden gems whose purpose is to comprehend the beauty of emerging markets and share it with others (and from investment perspective the beauty of emerging markets is in their inefficiency and alpha potential, which we would like to share with our investors in the form of our fund's stellar long-term performance).
Emerging markets investors traveling the world in search of hidden gems and their spiritual bronze friend based in Istanbul
Borsa Istanbul: where the magic happens
After four insightful company meetings, we were absolutely excited to ring the bell at Borsa Istanbul, Turkey’s stock exchange where all the multibagger magic happens. We expressed our gratitude to Borsa Istanbul’s executive vice president and two senior directors for providing a modern high-tech marketplace so that our fund could trade Turkish stocks and settle transactions in a highly efficient manner. We learned that Borsa Istanbul is a global leader in trading technology: it employs 250 IT personnel and even exports its technological prowess to markets in the Far East (Tokyo, Osaka, Singapore) and the Middle East (Abu Dhabi), supporting them with trading infrastructure.
The Borsa team thanked us for our presence in the Turkish stock market for over a decade regardless of macro circumstances which have driven nearly every other foreign fund out of Turkey. We shared that despite some of our clients in Finland implying that they would rather have us lose money in Vietnam than make money in Turkey – a true story from 2022 when Vietnam market was down over 30% while our Turkey stocks gained over 90% in EUR terms but some investors were still asking why are we so crazy investing in Turkey and not investing in Vietnam instead – we have held firm on our high-conviction cheap, growing, high-quality bottom-up investments in Turkey (aided by a currency hedge) and these stock picks have paid off many times over for our fund’s investors – including those Turkey critics, quite ironically.
The IPO environment in Turkey remains robust – largely driven by retail investors – with over 100 IPOs in Borsa’s pipeline: with interest rates in Turkey having gone up substantially, raising money from the public is more preferable for businesses than taking on debt. Last year, Borsa Istanbul was the 7th-largest stock exchange in the world in terms of IPO volumes – greater than London or Hong Kong exchanges – and the number of active retail brokerage accounts in the country is now at 8.5 million, a phenomenal increase from 1 million accounts just 3 years ago!
We appreciated the exchange’s focus on sustainability and social responsibility given its large role in the Turkish society and economy: it has a solar energy plant which supplies it with electricity; it has built 445 schools (none of which were damaged in the last two earthquakes); it has planted 3,000 trees; it supports university students with a 2-week education program (there is so much demand for that program that there is now a lottery to get in); it publishes the best financial journal in Turkey (Borsa Istanbul Review) which has a very high impact factor; and it even has a cat hotel on its premises which we had a pleasure seeing ourselves when we walked through the beautifully landscaped garden on Borsa’s campus, enjoying the greenery and the birds’ singing at sunset – who would have thought such tranquility can be found right in the heart of one of the busiest stock markets in the world?
To our tongue-in-cheek question whether Borsa Istanbul will ever go public, we received an equally humorous answer: when the valuation is right. And when we asked what is meant by “right”, we got a P/E figure of “60x”. While there are stock exchanges such as Tadawul in Saudi Arabia that trade at 60x P/E, this seems a bit expensive for our taste, but If Borsa Istanbul IPOed at 6x P/E we would be all over its stock trying to get as many shares as possible! (of course, if foreign investors get an allocation).
Visiting Borsa Istanbul: where stocks double
Working hard in the Canary Islands
On this trip, we were not able to meet with the founder CEO of our fourth portfolio company in Turkey, a $300m investment holding which owns the world’s largest cruise port operator. He wasn’t in Istanbul, and this is understandable: his company operates 33 cruise ports all over the world, including the massive port in the Bahamas (4th busiest cruise port in the world) and Europe’s largest cruise port in Barcelona (5th busiest in the world), and so he is always on the move – even more than we are – managing his ports and looking for new deals. As such, having met multiple times in Istanbul in the past, this time instead of an in-person meeting on our trip to Turkey we made a trip to southern Europe to do due diligence on five of the company’s cruise ports: we wanted to see their operations with our own eyes and meet the port managers running them.
We visited the cruise ports of Barcelona and Alicante in the continental Spain, as well as three ports in the Canary Islands: Las Palmas (Gran Canaria), Fuerteventura, and Lanzarote. All managers we met at these ports were highly upbeat, and not because of the sunny Spanish weather (which also helps, no doubt) but because the cruise industry keeps smashing passenger records and delivering tremendous profits to the ports – significantly above pre-pandemic numbers.
The Barcelona cruise port keeps getting busier as the vibrant city keeps getting even more popular with visitors looking for fun. The Alicante cruise port, on the other hand, is a newly discovered gem by tourists, cruise passengers, and digital nomads alike who enjoy the city’s revitalized old town and pleasant local pace of life. We toured the construction site for the new terminal at the Alicante cruise port which is being built by the company in line with its concession agreement and were satisfied with the construction quality and speed of execution.
The company won concessions for its three Canarian ports less than two years ago, and has already committed over $40m to their development, building new terminals in each port. We visited construction sites at all three ports and observed very busy work on the ground: Las Palmas port’s new terminal in Gran Canaria, for example, once completed will become Europe’s largest single cruise terminal and will be able to accommodate up to five ships at the same time. All three Canarian ports hosted very large numbers of visitors in their warm winter season this year, heralding an exceptional summer season for the company's continental ports.
We guess not many emerging markets investors go to the Canary Islands for a research trip – they would rather go there for vacation. We are used to going where others don’t, however, and believe this willingness to go/fly/swim/run/sail the extra mile when searching for hidden gems is one of the reasons why we have managed to continuously deliver top performance for our clients since the fund’s inception over a decade ago.
Meeting with the operations manager and assessing the new terminal construction progress of the Alicante cruise port, one of the 33 cruise port of the world’s largest cruise port operator from Turkey (4x P/E; 2023 earnings growth +71%; LTM stock price increase +106%)
Why do we love Turkey?
We said that we love Turkey for its stocks that keep on doubling. The abundance of small, liquid, cheap, growing, high-quality companies on Borsa Istanbul does make it a stock-picking thrill and a multibagger paradise for us.
But we also love Turkey for many other reasons.
We love Istanbul for its unique natural and historical beauty – in our book, it is one of the most beautiful cities on Earth (sharing the top spot with Cape Town). We also love the Turkish seaside for the escape from stressful urban chaos and tranquility it provides.
We love meeting and learning from world-class managers and top-notch intellectuals running impressive businesses, time after time. We also love the regular people who despite all the challenges of the daily hassle keep on working hard with a resilient attitude.
We love the delicious Turkish food and the Turkish coffee; and of course we also love the free Turkish tea served with every meal.
Perhaps, this is why Turkey is our fund’s most-visited market: since 2013, we made more than 20 trips to the country. Here’s to many more happy (multibagger) returns!
A fascinating view of the most beautiful city
We had written extensively about our past research trips to assess Turkish companies in our earlier blogs, which provide more information about the companies mentioned in this blog and also are, in our view, pleasant reads on their own merits. Here are the links to these past blogs:
October 2023: Big in Turkey: Even taxi drivers know our names
April 2023: Cruising our port-folio: Why we ate Turkish delight in Tuscany
September 2022: Visiting Turkey: Quadrupling capacity and crying in meetings