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So Cheap It Hurts

Waiting for "value" isn't easy. Here's a tip worth every penny it costs you...
NOT MUCH happening in the markets, writes Bill Bonner in his Diary of a Rogue Economist.
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 correspondent 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 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?
Assuming the market anomaly is still with us by the time this cranial indigestion has passed, we are ready to act. 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 trades 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 we 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 to us. 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.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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