Several decades ago, mutual fund managers such as Fidelity’s Peter Lynch and Legg Mason’s Bill Miller garnered a great deal of attention from investors and the financial media.

#-ad_banner-#These days, it’s the hotshot hedge fund managers, with their epic battles against companies such as Herbalife (NYSE: HLF) or Green Mountain Coffee Roasters (Nasdaq: GMCR), that get all the buzz. Proxy fights and bold short sale claims can be entertaining to watch and sometimes even create value for investors. 

Yet investing shouldn’t be about drama. 

Those now-obscure mutual fund managers deserve a lot more attention than they deserve, even if they rarely enjoy being in the spotlight. Thankfully, the mutual fund analysts at Morningstar single out the best and brightest mutual fund managers every year, helping steer investors toward the savviest stock pickers in the field. 

A current favorite: Los Angeles-based First Pacific Advisors (FPA). Morningstar anointed Steve Romick, the fund manager behind the FPA Crescent Fund (Nasdaq: FPACX), as the “2013 Asset Allocation Manager of the Year.” That five-star fund gets a “gold” rating from Morningstar. 

As Morningstar notes, “Romick seeks securities trading at a substantial discount to what he believes they’re worth. When opportunities are scarce, he will let cash pile up.” That appears to be the case right now. “We are about as bearish as we’ve ever been,” he said at an investment conference last month, noting that his cash position has risen to 40%.

But this fund manager has spotted value in a very controversial place: Russia.

According to recent filings, he has established positions in oil and gas giants Lukoil (OTC: LUKOY), Gazprom (OTC: OGZPY) and Rosneft (OTC: OJSCY). 

	First Pacific Advisors
	Steven Romick believes real value lies in distressed assets — and right now, these Russian energy companies are under pressure and cheap.

To be sure, there are safer ways to invest in the Russian energy sector during these uneasy times. My colleague Joseph Hogue recently suggested Chevron (NYSE: CVX) as a stealth play on Russia. That strategy allows for a better night’s sleep. But FPA’s Romick clearly believes that real value lies in distressed assets. And right now, these Russian energy companies are all under pressure and undeniably cheap.

Take Gazprom as an example. The company is the world’s second-largest energy producer behind Saudi Arabia’s Aramco. A financial snapshot tells the story. In 2013, Gazprom generated $160 billion in revenue, $58 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) and $35 billion in net income, according to Goldman Sachs.

To be sure, much of Gazprom’s oil and gas output heads to Western Europe through Ukrainian pipelines, and the chance always exists that the pipeline gets shut down for a month or two if geopolitics becomes especially heated. “By way of EBITDA sensitivity, we estimate that a one-month interruption in gas transit to East Europe via Ukraine (our worst-case scenario) would lead to 1.6% lower (expected 2014 EBITDA),” note Goldman’s analysts.

If history is any guide, such shutdowns rarely last much longer than that, as they inflict too much economic pain on all parties. 

So how are the markets valuing Gazprom these days?

Shares trade for around 2.3 times projected 2015 EBITDA. That figure is around 4.8 for Exxon Mobil (NYSE: XOM) and 4.5 for Chevron. Lukoil is about as cheap as Gazprom, and Rosneft’s valuation lies halfway the Western and Russian oil majors (at around 3.7 times 2015 EBITDA). 

The BP Analogy
Contrarian value investors such as FPA’s Romick know that you can only score big gains when controversy leads to a mispricing of assets. It’s a theme I discussed nearly four years ago, when looking at the disastrous oil spill in the Gulf of Mexico. At the time, shares of BP (NYSE: BP) had lost half of their value in a matter of months, as the risk of owning such a stock seemed to be too great.

The setup for these Russian oil stocks is now similar. The headwinds are more obvious than the tailwinds at the moment, which is why these stocks are so cheap in relation to EBITDA. 

Risks to Consider: The U.S. and Russia could still engage in even more heated rhetoric, which could put these Russian energy stocks under fresh selling pressure.

Action to Take –> Whether an investment in Russian energy stocks is suitable for you is a personal decision. But the lesson for investors should be clear: Controversy can often create deep value disconnects, as FPA’s Romick is currently exploiting. It’s an important lesson to remember the next time you see a stock or industry valuation plunge due to an unrelated external event.

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