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.
Yes, Gazprom is hated. But that’s precisely what makes it a good investment. Today, Gazprom trades at the same level as it did in the 1990s, when Russia was massively in debt, had no currency reserves and oil was trading at $25.
And with Russia’s President Vladimir Putin pulling troops back from the Ukraine borders, short-term political risks of investing in Russia have abated, as well.
Amazon: The New U.S. Blue Chip
Amazon is the Energizer Bunny of growth stocks — it just keeps growing and growing. Even in the midst of the economic slowdown, Amazon has more than doubled its revenue between 2010 and 2013.
But massive revenue growth is just not enough.
Most notably, Amazon’s profits are almost non-existent — a mere $108 million on a massive $19.7 billion in revenue. Amazon’s earnings guidance has consistently also disappointed investors. Throw in the cost of big warehouse expansions during 2014 and 2015, and profits at Amazon are hardly expected to pick up any time soon.
And while Gazprom is mocked as a tool of Russian foreign policy, Amazon engages in some questionably quixotic projects as well. Fire TV, Drones, a digital currency and an Amazon smartphone aren’t likely to deliver more money into investors’ pockets any time soon.
But most importantly, it’s valuation that makes Amazon such a lousy bet.
Amazon trades on a current P/E of 463. If Gazprom were trading at Amazon’s valuation, its market cap would be around $17 trillion — roughly the value of the entire U.S. Gross Domestic Product for 2014.
And the winner is…
Both Gazprom and Amazon will be around a very long time. But which company is a better investment over the next 12 to 18 months?
Amazon has had a rough 2014. Down 25.58% this year, the stock has actually performed worse than the Russian market — itself the worst-performing stock market in the world.
Meanwhile, since bottoming in March, Gazprom has rallied 34%, leaving it flat for the year.
The bottom line?
I’d put my money on Gazprom. The stock has traded at 10 times forward earnings as recently as 2006 versus 2.7 times today. If Gazprom rallies back up to a still incredibly cheap P/E of 4.0, you will have booked a 50% gain in the stock.
And that’ll happen long before Amazon ever hits $450.
In case you missed it, I encourage you to read my e-letter column from last week about how to make a fortune in the new American Revolution. I also invite you to comment in the space provided below.
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