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Buy When There Is Blood In The Streets To Reap Huge Profits In Gazprom

August 04, 2014 | About:

One of Warren Buffett (Trades, Portfolio)’s well-known pieces of advice is to “be fearful when others are greedy and greedy when others are fearful.” You might have also heard the old adage, normally attributed to Baron Rothschild “that the time to buy is when there is blood in the streets.” Investment advisory guru Dr. Steve Sjuggerud likes to say the time to buy is when things go from bad to less bad. Value oriented, contrarian investors can rattle off a litany of euphemisms describing what we do in cute little sound bites. However, like most worthwhile things in life, those simple adages are far easier to say than the actions are to take. When the time comes to put real money into the investment, most who like to believe themselves to be deep value, contrarian investors turn away and fail to take the plunge. Dr. Steve Sjuggerud also likes to point out that the hard trade is usually the right trade. My version of that is: If it was easy, everyone would do it.

Russian Stocks Are About As Cheap As They Can Get

With a former KGB agent, Vladimir Putin, running the country as if it were the old USSR and engaging in a proxy war in the Ukraine and threatening European energy supplies, the already embattled Russian stock market has been slammed hard by selling pressure as foreign investors sell in fear of further economic sanctions being imposed that will cause further damage to the Russian economy. I cannot even begin to guess what Vladimir Putin might do next or what retaliatory steps the west might take in response. What I do know with great certainty is that people and governments always end up doing what they believe is in their own best interest and that means having adequate access to products and services they must have.

Difficult political situations might affect the price of a particular stock but they do not affect the value of the products or services that business provides, especially if that business is the best, or only, source of readily available supply. That is the situation with which investors are faced today in regard to shares of Russian oil and gas giant Gazprom (OGZPY).

While the actions of Vladimir Putin are despised, and rightly so, by most western nations, and the targeted sanctions imposed to this point have crippled its stock market, they have not and cannot have any real effect on the intrinsic value of the value of oil and gas reserves owned by Gazprom. Even if the U.S. wanted to replace the supplies of oil and gas its European allies currently purchase from Russia, it has no way to deliver the product to the customers effectively. Furthermore, oil and gas are global supply markets so it really makes little difference which customers purchase from what sources, it is sort of like everyone drinking with straws from the same cup. It doesn’t matter which straw you drink from, it all comes from the same large glass. The illusion of imposing “tough sanctions” is just something that allows the politicians to express their moral outrage while not actually having to experience any real negative consequences from it.

Oil is oil and natural gas is natural gas and the global market price is the global market price. If China needs oil and gas supplies this winter, does anyone really believe they will care what Vladimir Putin is doing in the Ukraine? They will purchase what they need from the most readily available source of supply. The perception that the reality of the situation is what helps to create the spectacular value to be found today in the shares of Gazprom. This business is priced so cheaply today that it would have to double before it would classify as cheap.

What Constitutes Stupid Cheap?

Analysts covering Gazprom’s stock project that the company will earn $2.79/share during the current year. The current share price is $7.36 and the current P/E ratio is 2.64 times current year earnings. The current price to cash flow ratio is 1.72, meaning the company generates enough free cash to cover its entire market capitalization about every 21 months!

Just as a means of comparison, the industry average P/E is currently 12.74 times earnings and the current average price to free cash flow is 6.23. However, if you prefer a really basic valuation like price to book value, one of the favorite metrics of famed value investor Benjamin Graham, you will find that the business trades at a ridiculous level of 0.31 times book value when the industry average is a reasonable 1.47 times book value.

As previously stated, this is a business where the stock price could double and still be cheap by just about any metric commonly used in establishing fair market value. But one last area that could justify seemingly cheap valuation of a business providing critical products could be grossly incompetent management. At Gazprom, that does not appear to be a problem. 5-year average returns on equity, assets and capital have been 15.1%, 10.7% and 13.4% respectively. These are very solid numbers for any significant business and are right in line with the overall industry averages.

Final Thoughts And Actionable Conclusions

Based upon a pure fundamental analysis of Gazprom, the shares are priced at a ridiculously low valuation driven by investors’ fear over the potential short-term impact of sanctions. As explained above, in the market for global commodities, there is a limited pool of a given resource and if one customer does take your product, you simply sell it to another customer who will. If the Europeans do not want to buy Russia’s oil and gas on the open market, I have little doubt the Chinese will be happy to purchase it.

The concerns I see currently depressing the price of Gazprom shares are driven by global politics and have absolutely no impact on the value of the assets owned by the business. True contrarians are always looking for value when there is “blood in the streets” that is creating compelling valuations. In the case of Gazprom today, that is literally the case. Buy now and you should see the price double, or more, in the next 24 months.

About the author:

Ken McGaha
Ken McGaha has been managing his own investment portfolios for over 20 years. On July 20, 2012 he launched the Self-Made Millionaire Tracking Portfolio with a portion of his capital as an aid to teach younger members of his extended family how he built his own investment portfolios and maintains them today.

Ken's Self-Made Millionaire website now has subscribers in at least 13 countries and the Self-Made Millionaire Tracking Portfolio has delivered a 28.36% annualized rate of return on capital between July 20, 2012 and June 21, 2014.

In late December of 2013, Ken added the Maggie's Money Mountain Tracking Portfolio to his website to show young investors with limited capital how he would invest and trade an account with $4,500 in order to grow it at a compounded rate of 12% annually. From December 30, 2013 through June 21, 2014, this account has produced an actual return of 26.05%.

Visit Ken McGaha's Website


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Comments

perf_guru
Perf_guru - 2 months ago

"oil and gas are global supply markets so it really makes little difference which customers purchase from what sources, it is sort of like everyone drinking with straws from the same cup."

Why, then, did China and Russia invest $400 billion in getting Russian gas to China when China could have simply purchased the gas from global supply markets?

Ken McGaha
Ken McGaha - 2 months ago

I believe that deal was done at least in part to further distance their trade from any ties to the US dollar. China and Russia are both interested in seeing the world move away from using the US dollar as the global medium of exchange for settlement of trades. They have just completed an arrangement to conduct all of their mutual trades in their own currencies and eliminate the use of US dollars for those transactions.

Russia is also very interested in showing the EU that they can get around Eurpoean economic sanctions against them much more easily than the EU can replace their supplies of natural gas they currently acquire from Russia.

If more countries decide to follow their lead, the US is headed for real problems when it comes to the issue of continuing to finance the large and never ending budget deficits. If that situation develops, it will have an interesting impact on the prices of commodities prices.

Best regards and better profits,

Ken

Moevestor
Moevestor - 1 month ago

I have to tell you Ken that I just wrote up an article over at Fast Stock Cash that deals with Gazprom and where its stock price should be. With the Ukrainian dispute starting to heat up, this may be even more blood in the water, thus giving anyone like myself a great entry point. I would also suggest to your readers to use a dollar cost averaging over the next few months to get a full position in the stock. It will help if the stock has a sudden fall from further sanctions.

Great to see like minded articles out there.

Moe

batbeer2
Batbeer2 premium member - 1 month ago

Thanks for an interesting article.

You say:

>> Based upon a pure fundamental analysis of Gazprom, the shares are priced at a ridiculously low valuation driven by investors’ fear over the potential short-term impact of sanctions.

How do you know what has spooked investors?

I wouldn't rule out the possibility that it's something else. Maybe investors fear that those shares don't really represent ownership of the (admittedly valuable) assets.

The logic being that it does not matter what the assets are worth if those shares you bought in the US hold no claim over them. Rightly or wrongly, that fear is unlikley to disapear as long as Putin is running Russia.

Come to think of it, Putin could borrow a page from the US government and apply the Fannie Mae/Freddie Mac logic devised by the treasury to disown shareholders in the interest of the economy and financial stability.

Maybe you could share your thoughts on the likelihood of Russia disowning Gazprom shareholders?

http://www.thefreelibrary.com/Putin+Hints+He+May+Re-Nationalise+Oil%3B+Hits+The+US+Court+Action+For...-a0126531715

http://uk.reuters.com/article/2014/07/28/uk-russia-yukos-idUKKBN0FX08M20140728

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