Back when Peter Lynch was the manager of the Fidelity Magellan mutual fund, he offered mom ‘n pop investors the folksy advice of “invest in what you know.”
According to Lynch, successful investing was as simple as going to the mall and buying the stock of the retail chain where the lines are the longest.
As appealing as the story is, it’s also far too simplistic.
It also contradicts Lynch’s own experience. Lynch actually made the bulk of his money betting on a down-and-out Chrysler — a stock no one wanted to touch — which then turned into a “ten bagger.”
Today’s version of Lynch’s story
Ask 100 American investors which would be the better place to put their money to work over the next 12 months — the familiar and trusted Amazon.com Inc. (AMZN)or the Russian government crony-run natural gas company Gazprom (OGZPY)— and I bet nearly 100% would pick Amazon. And I think they would be wrong.
Amazon is a bigger part of my life than shopping malls ever were. I am an Amazon Prime member and get deliveries every day, even here in London.
But contrary to Lynch’s advice, I don’t make the mistake of confusing a product I see every day with a good investment.
Despite my many misgivings about Russia and Gazprom’s future in the shale gas world, I’m betting that you’ll make more money investing in Gazprom than Amazon over the next 12 months.
Gazprom: Russia’s Bad Boy
James Grant recently called Gazprom the “worst managed company on the planet.”
That may be true. But, as Grant himself pointed out, that alone does not make it a bad investment.
Gazprom controls 65% of Russia’s gas reserves. It also boasts revenues of $166 billion — just about twice those of Amazon. It has a return on equity (ROE) of about 13% and a net profit margin of nearly 30%. By way of comparison, Exxon Mobil (XOM) has a net profit margin only half as good. That’s why Gazprom made more in net profit than ExxonMobil did last year on less than half the revenues.
Yet, today, you can buy Exxon at a price-to-earnings (P/E) ratio of 13.8 while Gazprom trades at a P/E of 2.7.
Gazprom is so cheap because it is a tool of Russia’s aggressive foreign policy. Most recently, Gazprom raised natural gas prices sold to Ukraine in retaliation for the recent government coup.
Gazprom also supplies approximately 30% of Europe’s natural gas. That lets the company enjoy an exalted position and also explains why Russia’s biggest company has been exempt from U.S. and European Union sanctions.
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.