Last Tuesday, the 2nd of February, we had our first meeting of the new year. Almost too much to cover happened and the meeting promised to be exciting!
Bitcoin We kicked off with Bitcoin and whether it has any fundamental value? The answer was a clear no. It does not have any underlying assets, nor does it offer a dividend – the only thing you can end up eating. Stocks usually go up if earnings go up, but for Bitcoin, the Greater Fool theory applies – you can only sell it to the next fool – just like a Tulip bulb.
However, we also saw bullish indicators for the digital gold. Where the FED and ECB balance sheets are exploding, the total supply of Bitcoin is limited to a mere 21 million, which might make it a reliable store of wealth, like gold.
If supply is limited and Bitcoin has no fundamental value, demand must plays a crucial role in determining its price. As more people buy it and want to get into the game, the price can surge higher. However, if those who own it start selling, the price plunges. So, what might happen to demand?
One bullish indicator is the high interest of the millennial generation for crypto. Even though this generation lacks funds to invest now, there is a whopping $68 trillion in inheritances coming their way in the ‘greatest wealth transfer in history’. Moreover, institutional investors recently joined the party, which increases the credibility of the digital currency.
Share Price bubble In the next topic, we discussed the IMF’s warning for a share price bubble: last 203 trading-days posted the biggest gains since 1933 and investors could be looking forward to a ‘lost decade’ in the stock market. Why? The answer is simple. Stock prices have exploded, but earnings have gone nowhere but flat for the last decade.
Low-interest rates can (partly) explain the high valuations. Investors increase risk-taking and ‘reach for yield’. Even though stocks seem detached from fundamentals, valuations might remain high for a long time. Merely saying ‘stocks are high” is not the same as saying the next move will be downward – even though stocks seem to be expensive now, they might look cheap looking backwards. However, the warning is unambiguous: (new) market participants may need a stronger stomach and more patience than they think to gain the hypothetical premium of stocks over bonds.
GameStop Mania Next up, we discussed GameStop Mania. What happened? Hedge funds speculated that share prices of Gamestop, a struggling video game distributor that missed the transition to the digital world, went to zero. However, an investor on Reddit named ‘Roaring Kitty’ liked the stock, and he went all in.
Investors on Reddit saw the opportunity for a’ Short Squeeze’ and joined the train wagon. They could smoke out the shorts by buying the stock en masse. Even though many consider it as speculation, you could see it as a value play as well. The hedge funds were just offering to do something very foolish: promising to buy back all shares at any price. It wouldn’t make sense not to use that opportunity.
Portfolio Overview Next up, we had our portfolio overview. Our Alpha was 2.80%, which is just a fancy way to say that we beat the market big-time since the last meeting.
Especially BAIDU stood out with a 50% gain since they announced to enter the EV market. Aegon performed well since bond yields in the US shot up.
Gazprom: A Russian Giant setting up for Eurasian Gas Market Dominance The buy pitch on the Russian company Gazprom followed the portfolio overview. The bull thesis argued that Gazprom is wildly undervalued and recent changes make it a screaming buy.
Strong moat in a growing market Gazprom has a monopoly-like position in natural gas and 80 years of reserves left. The most recent energy outlook of BP (an oil company!) paints a clear picture of the future energy demand: gas consumption is surging while oil demand already peaked. The most important reason is that natural gas is an affordable and clean alternative for more carbon-intensive coal and oil.
Based on cashflows alone, we would expect oil companies to trade at a discount compared to Gazprom. However, the reverse is true: Gazprom trades at only a third of the valuation of Supermajors. Why? Besides the additional risk premium on Russian stocks, the market has concerns around Nord Stream 2. Gazprom’s second pipeline towards Europe seems to be in trouble since the Americans want to sell their own more expensive LNG gas to Europe and impose sanctions on the project.
As the market seems focused on Nord Stream 2, it might ignore the upside of the ‘Power of Siberia’ project. Gazprom signed contracts to supply 40% of the gas supply of China as soon as 2025. This development is quite mouthwatering for shareholders, especially since Chinese energy demand is soaring, and Chinese gas prices are high compared to Europe’s.
Moreover, the Norwegian and Italian gas fields are nearing exhaustion – no wonder that the World Energy Outlook expects that Europe needs to double its gas imports – putting Gazprom in a unique price-setting position.
Members were concerned that the valuation could stay low – Russian stocks have never been popular, and valuations are not likely to change given the current political situation.
If nothing else, however, Gazprom is set to become an ATM machine. This situation is similar to that of Western cigarette companies (even though I would personally not invest in them – for obvious reasons). An unfavourable reputation, but HUGE returns for shareholders because it’s paying out a lot of cash through dividends.
Altria Group, for example, the company that owns Malborough, has been one of the world’s best performing shares despite the backlash against smoking, and that should tell you something. Because of its steady cashflows, Altria shares soared more than 5,000 times (!) since 1970; an impressive annual return of 20%. Producing a glut of cash off the back of an unloved but stable business has made Altria one of the world’s top performers.
Back to Gazprom – the stock should provide a deep margin of safety since the downside seems to be priced in already, leaving a lot of room for potential upside. Investments are likely to pay off, ensuring stable earnings growth. Since the investment cycle has ended, the company can increase its payout ratio and focus on rewarding shareholders via dividends, making it a potential multi-bagger for the coming years. Gazprom offers a compelling investment case – especially for patient and contrarian investors willing to look beyond Russia-specific concerns.
Sell pitch Rocket Companies A sell pitch on Rocket Companies – an online mortgage provider – followed Gazprom’s buy pitch. The bear thesis was straightforward. The stock seems expensive, while it has limited revenue and earnings growth – offering no safety net in case Mr. Market becomes a pessimist once again.
The only bullish catalyst might be that Rocket is an exciting takeover candidate for the big banks. However, we should have more reasons to own a stock than the hope that others will bail us out.
It was great to see so many of you, and we hope to welcome you at our next meeting on Tuesday the 2nd of March!
Disclaimer: This article is written for entertainment purposes only and should not be considered as investment advice.