Buy This Russian Stock For Double Gains Within Three Years

Oil (and gas) make the world go round. Not money. So if you believe the dollar will weaken against the ruble. And if you believe that oil prices are more likely to go to $60 than they are $40, then boy do we have a product for you.

When it comes to buying stocks in Russia, there is one company even the casual passer-by knows, and that is Gazprom .  It is one of the largest natural gas producers in the world, and surely the largest in Russia. It is diversifying into China. The long term outlook for this company -- for investors who are not afraid of owning state-run enterprises -- is strong despite the political problems. Plus, the stock is trading at just four times earnings.  Try finding a large cap energy stock trading at multiples that low.

For those reasons, deep value and market depth, Gazprom is a buy for investors with a two to three year time horizon.

American investors don't know a Russian broker to buy it either. It trades fairly liquid (over 500,000 shares daily) on the over the counter market. There is currency risk, but investors who believe the Russian ruble will strengthen over the next two years will gain even more because of the foreign exchange rate.

On the Micex, Gazprom is up 14% year-to-date. But in the OTC market, the dollar denominated shares of Gazprom, helped along by a stronger ruble, is up 23%.

Gazprom is a buy for investors who believe oil will not head back into the low $40s anytime soon. Oil prices are currently in the low $50s.  There's also the ruble variable here. A stronger ruble is likely to be offset by higher prices for natural gas.

During an energy conference this week in Germany, Gazprom CEO Alexei Miller said Europe's plan for a single price for Gazprom gas will ultimately mean a higher price for Gazprom gas. This is the bread and butter of Gazprom. Currently, Gazprom sells natural gas at different prices within the E.U.

“If the European Commission will insist on equal prices then of course, as you understand, a common price isn't the lowest price,” Miller said. “It will most obviously be the highest price.”

Gazprom is "one of my favorites between the Russian blue chips. Compared to its peers it is really cheap,"  says Arent Thijsen, owner of T&E Inmaxxa, an investment firm in The Netherlands with money at work in Gazprom.

There are political risks involved here.

Gazprom is currently sanctioned by the U.S.  European companies are banned from doing business with Gazprom upstream, but are still allowed to buy natural gas to serve its local market. Gazprom accounts for nearly a third of all E.U. natural gas imports, and as Gazprom gets slowly cut out of the E.U., it will quickly replace them with new long term contracts being signed with China.

Gazprom also trades along with the so-called Ukraine variable, so as long as the Russia-Ukraine political imbroglio continues, Gazprom will be volatile. Investors should take a cue from that and buy on the bad news.  The worst things get in Ukraine, the worst things look for Gazprom as far as investor sentiment is concerned.

The Russian gas giant recently signed a deal with Ukraine's Naftogaz that will keep things cool between them at least until June 30. After that, political risk will rear its ugly head again.

The Wall Street Journal reported that Margrethe Vestager, the European official in charge of competitive practices within the Union, will soon bring charges against Gazprom in an antitrust investigation. She alleges that the company has been demanding unfairly high prices from some European countries.  Ukraine is also in legal dispute with Gazprom in a Stockholm court.

But all of this will not scare off long termers, especially those who believe a stronger ruble is a year or two away.  For much of the past four years, the ruble has traded within a relatively stable band of 30 to 37 to the dollar.

Another BRIC market serves as an example here.

Earlier this year, Brazil's state-run oil company Petrobras was trading at just $5 a share with a price to earnings ratio of only three times trailing 12 month earnings. It faces massive political headwinds, just like Gazprom. Oil could have gone to $100 a barrel and it would not have saved Petrobras.  The company is still in the midst of one of the worst political scandals in Brazil's corporate history.

However, like Gazprom, investors are looking long term. Those who can see beyond the current turmoil will do well if they take the risk.

If the "buy when there's blood in the streets" mantra holds any sway over an individual investor, then Gazprom is definitely in play.

By the way, over the last four weeks, Petrobras bottomed out at $5.01 in mid-March and is now up 9.93% year-to-date.

Investors that bought on the Ukraine-variable lows of $4 on Feb. 2 are now up 33%. Gazprom is trading at $5.60 OTC as of Monday.

"The downside risks are pretty well known," says Thijsen. "It's politically connected to the (Vladimir) Putin regime and to corruption. At the moment, it's being punished by sanctions. But when they will disappear, the profit potential is enormous."  Companies*

Eni SpA: 47.78

BP: 34.5

Total S.A.: 27.5

PetroChina: 17.18

Royal Dutch Shell: 12.69

YPF: 12.17

ExxonMobil: 11.25

Chevron: 10.5

Lukoil: 8.16

Petrobras: 8.13

Rosneft: 7.78

Gazprom: 4.08

*TTM