Not much to report from the markets. The Dow up a bit. The Nasdaq down a bit. Gold flat. Twitter got slammed again. Shares in the online “self-expression platform” are down about 50% so far this year.
Your editor believes he recommended you sell high-flying tech stocks. If he didn’t, he should have. But he does not usually make investment recommendations. He does not do investment analysis. He does not often invest.
Instead, he waits. And waits. And waits – until a bargain screams so loudly in his ear it threatens his hearing.
But even at that moment, he hesitates. When something is so cheap it appears to be a “once-in-a-lifetime opportunity” his feet grow cold.
What’s wrong with it, he wonders? If it’s so cheap, there must be a reason. What do all those people who don’t want it know that he doesn’t? Blood in the streets doesn’t bother him; but what if the next blood trickling down the gutter is his own!
Then he is delayed and disturbed by the philosophic implications. If there had really been a dollar bill lying on the sidewalk in front of him, surely someone would have picked it up? And if someone had picked it up… it couldn’t still be there, could it? Well then, it isn’t there, no matter what his eyes tell him.
But what do skittish, panic-prone markets do… except wig out from time to time? And what good are they if coldblooded and steel-nerved investors can’t take advantage of them? And how would they ever get back to normal if all investors took temporary madness as proof of permanent impairment?
A Mother’s Day Gift
Assuming the market anomaly is still with us by the time this cranial indigestion has passed, we are ready to act. And you, dear reader, are the beneficiary. For today, we give you a recommendation…
After all, it is Mother’s Day on Sunday. Perhaps Mr. Market is feeling flush with filial fondness for dear ol’ mom. Here he comes… his hands forward and a bright red bow wrapped around his precious gift.
What is it? Gazprom!
We are talking about Russia… and specifically about a gift that keeps on giving. Gazprom controls more than 15% of global gas production and reserves. And we expect it is going to be selling that gas for a long, long time.
Gazprom (which you can buy on the Pink Sheets in the US under ticker symbol OGZPY) has a return on equity of about 13%… and a net profit margin of nearly 30%. By comparison, ExxonMobil has an ROE of 18% and a net profit margin only half as high.
According to data from Reuters, you can buy ExxonMobil for 13.8 times its 12-month “as reported” earnings. And you can buy Gazprom for just 2.7 times its 12-month “as reported” earnings.
By this measure, a dollar’s worth of earnings from the US oil major will cost you $13.80. But each dollar of Gazprom’s earnings will cost you just $2.70.
Does this mean you should expect the share price of Gazprom to go up any time soon?
For all we know, the entire Russian army stands amassed on the border of Ukraine, and every valve capable of delivering Russian gas to Europe has a pair of hands on it, determined to shut it off.
Another fact recorded in the book we can’t seem to find, is that next year an inventor will discover a marvelous way to power the world on water – making gas obsolete. And the year after, a report from the FDA will tell us that Russian gas causes people to gain weight – another devastating blow to Gazprom.
All we know is that some things are expensive and other things are cheap; and Gazprom looks more down than up. Of course, we spend our investment lives looking for assets that are absurdly cheap; when we come face to face with one, we don’t want to duck.
Further Reading: Buying “when there’s blood in the streets” is just one of the strategies the ultra wealthy use to grow their wealth. To find out what other strategies they use, Bill’s son Will recently “infiltrated” a meeting of a very elite group of wealthy families in London… in the city’s oldest gentlemen’s club. The secrets Will discovered could help you cross what he calls the “invisible barrier” to wealth. Read on here to find out what Will discovered – and how it could transform your financial situation.
Crunching Gazprom’s Numbers
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
There are as many phony contrarians out there as there are phony Elvises.
Everyone is a contrarian, until a market panic rears its ugly head. Then most “contrarians” head for the hills along with the stampeding crowd.
Nevertheless, if you can zig when other investors zag, you have a fighting chance of making some real money in the markets.
One of the most well-thumbed books on my desk is Contrarian Investment Strategies: The Next Generation, by famed contrarian investor David Dreman, the founder and chairman of Dreman Value Management and a former senior editor of value-based research firm Value Line.
According to Dreman,
One of the most obvious and consistent variables that can be harnessed into a workable investment strategy is the continuous overreaction of man himself to companies he considers to have excellent or mundane prospects.
And he offers a related investment rule:
Buy solid companies currently out of favor, as measured by their price-to-earnings, price-to-cash flow or price-to-book value ratios, or by their high yields.
Let’s look at how some of those value ratios stack up for Gazprom, using figures from Morningstar…
As Bill reports, Gazprom trades on a trailing price-to-earnings ratio of 2.7. This compares to an industry average of 13.1. That’s a 79% discount to the industry average.
The company, meanwhile, has a price-to-book of 0.3, versus an industry average of 1.5. That’s an 80% discount to the industry average.
And Gazprom yields 5%, versus an industry average of 3.3%. That’s a yield 51% higher than the industry average.
Of course, Gazprom is Russian. It’s run by cronies of swaggering Russian president and former KGB man Vladimir Putin. And Putin is not shy about using Gazprom as an economic weapon in the Russia-Ukraine conflict.
But remember: Stocks are cheap because there is fear over their futures. And try as you might, you don’t find bargains without high levels of fear and negative sentiment.
So, you have a choice: Run away along with the investment crowd. Or recognize the value on offer and buy.
One important caveat: As Bill mentioned, this isn’t a good investment if you are hoping to make a fast buck. It could take many years for sentiment to turn positive toward the Russian stock market… and many years for Gazprom’s P/E multiple to expand.
But even if Gazprom’s price-to-earnings ratio moves back inline with its five-year average of 3.8, presuming earnings per share stay consistent, that represents a 46% profit from current levels.
Is this a comfortable investment?
Absolutely not. But at Bonner & Partners we see that as a good sign, not a bad one.