The cheapest blue chip stock in the world
Take a beaten-down commodity and a gigantic company trading at low levels, says a British advisory, and take a chance on massive returns.
Natural gas prices made news this week by hitting their lowest levels in seven years.
That’s no great surprise. Natural gas prices have been in the dumps for some time. One Canadian firm that drilled 161 wells in the second quarter last year drilled precisely none in its most recent quarter.
So it should be easy to pick up some cheap natural gas stocks.
But would it be worth it? Can things get that much better, even with the winter heating season coming on?
Go ahead, says a leading British advisory. Take a chance on one of the biggest natural gas firms in the world.
Look across Europe to Russian giant Gazprom (LSE-OGZD). It’s the cheapest blue chip stock in the world, says The Fleet Street Letter.
Writing for the advisory, Mr. Theo Casey begins his story on Wall Street, with a best-selling book.
No tears
Published almost 20 years ago, Liar’s Poker was a first-hand account of the wild and woolly ways of Wall Street in the 1980s, written by former bond trader Michael Lewis. (He was later the author of Moneyball, the most controversial baseball book of its generation).
In “the most powerful exchange in the book,” says Mr. Casey, former Salomon Brothers chairman Mr. John Gutfreund sits down with his chief trader, Mr. John Meriwether, for a game of liar’s poker — in which the players effectively bet on the serial numbers of dollar bills.
Mr. Gutfreund’s challenge: “One hand. One million dollars. No tears.”
High risk, high reward, winner take all. “To break with our conservative streak,” says Mr. Casey, “that is the game we’re going to play today. We’re putting a risky stock on our watchlist.”
Buy Gazprom when our target price is triggered, he says — and no tears.
Good news, bad news
Mr. Casey has a good news-bad news scenario. The good news is Gazprom’s prominence. Controlled by the government, it controls 60 per cent of Russia’s total gas reserves — and 17 per cent of the world’s total.
It pumps 20 per cent of all the gas produced in the world every day. And yet it trades at astonishing low multiples, not much more than 2 times earnings, according to international expert Morgan Stanley.
“The bad news: It’s Gazprom!” exclaims the author. “Casual investors will wince at this recommendation.”
For one thing, its CDS (the cost of insuring against debt collapse) is a whopping 402. For a low-risk stock like big British food chain Tesco (LSE-TSCO), the figure is 99.
“402 marks a very high level of fear,” Mr. Casey states, “although that fear appears to be already ‘priced in.’ The fear that we Brits have over the Russians is merited, but that must not cloud your judgement.”
Cheap for three reasons
There are three reasons Gazprom is cheap. The credit crunch is the first. It dealt a “particularly nasty blow to emerging market stocks,” says Mr. Casey. They sold off much faster than developed markets.
Reason number two is Russia itself. “Not only is Russia an emerging market, it’s an unpopular one.” It tracked the price of oil all the way down, but not back up again.
The third reason is the commodity itself. Natural gas, “unlike nearly every other commodity in the world, never really recovered after the credit crunch.”
The problem is not shortages, but a glut of the stuff, adds the author. And it sells at an even lower price in Russia than elsewhere.
Three reasons to buy
But there are also three reasons the advisory likes the outlook for Gazprom. In the first place, Gazprom isn’t just cheap compared to other energy majors, it’s also cheap compared to other Russian energy stocks.
In the meantime, it expects its earnings to rise 75 per cent for 2010. That would make it incredibly undervalued.
Second, the potential for this giant firm is enormous. Over the long term, says Mr. Casey, the company can double its value. London’s financial wizards in The City agree. There are 16 recommendations on Gazprom, and every one is a buy.
The third reason is a slightly subtler one. When investors return to Russia, as they will, they will not plunge back into the riskiest part of the market. They will go through Gazprom. Investors looking for a stake in Russia, and in natural gas, will choose this big, government-controlled firm.
So when does one get in, asks Mr. Casey? “Not yet. We are still in the summer silly season.”
Two conditions must be fulfilled, one down and one up. The stock must become even cheaper. This is no value trap, says the author. At a certain price, he says, we would buy and hold on “for massive returns.”
With the world’s largest supply of natural gas and greatest network of pipelines, Gazprom is a sort of proxy for natural gas. “If natural gas can break out of its miserable slump,” adds Mr. Casey, “that too would spark our recommendation.”
Let the price fall below $17, he announces. It stands at $21.20. And let the price of gas reach $5 a British Thermal Unit (BTU). It’s at $2.76.
For investors willing to take the plunge, remember. There’s no crying in liar’s poker or investing.
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