My Best Idea for 2017: Navios Maritime Holdings

 | Jan 03, 2017 | 8:00 AM EST
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My best idea for 2017 is the same -- or quite similar -- to the security featured as my Real Money Best Idea for 11 months of 2016 -- Navios Maritime Holdings (NM) .

Navios closed Dec. 21, 2015, at $1.28. NM shares closed Dec. 16, 2016, at $1.28. So one might think that nothing had transpired in 52 weeks. Perhaps Navios' shares were sailing as smoothly as one of its 180,000-deadweight-ton Capesize bulk carriers glide across the Pacific.

Uh, no.

In mid-December 2015 dry bulk shipping's main freight-rate index was about to enter a death dive that would bring the index level to 290, the lowest reading in its 35-year history. An extraordinary plunge, and one that mirrored the drop in prices of the commodities that Navios ships transport, notably coal and iron ore.

That would prove to be a buying opportunity for NM shares and especially for the Series G and Series H shares that my firm loaded up on at $0.14 to $0.16 per share. I also made Navios' Series G my Real Money Best Idea on Jan. 20, 2016. We would eventually tender our shares in November as part of an exchange offer that averaged $0.29 on the dollar.

So, a great trade for my firm, but no value investor buys with an exit strategy of "harvesting a little more than a quarter on the dollar." No, we want to get much closer to dollar-for-dollar on NAV, a figure that by my calculations stood at $4.05 for Navios as of Sept. 30, 2016.

That's why I have selected Navios Maritime as my Best Idea for 2017.

Navios shares shouldn't be whipsawing with the daily fluctuations of the Baltic Dry Index (BDI). Navios has no ships trading in the spot market. Zero. Yet NM shares tend to move sharply based on each day's afternoon fixing in London at the BDI.

I believe NM shares will break out of that boom-bust, BDI-driven range in 2017 and head back to the levels seen earlier in this decade and toward that NAV of $4.05. Three reasons:

Navios reaches a settlement with Vale. Navios South American Logistics (63.8% owned by NM) has invested $142 million in a freight terminal in Uruguay. This investment was made pursuant to a take-or-pay contract with Vale. In April Vale announced it would not be fulfilling its contract. The matter is currently in arbitration and any resolution -- as opposed to a newly-constructed terminal sitting unused in Hidrovia -- will be a positive catalyst for NM shares.

Sanity returns to dry bulk freight rates. The first quarter is typically the slowest for bulk shipments, and freight rates have declined in December after November's big jump. Still on Dec. 20 the BDI is sitting at 914 compared with the year's low of 290, and I don't believe freight rates will be anywhere near as volatile in 2017 as they were in 2016. The newbuild-to-fleet ratio is at a 14-year low, and that cessation of supply overhang will support rates throughout the year, in my opinion. For the past two years, Navios shares have paid a huge penalty due to volatility in freight rates -- hence the massive discount to NAV -- and I believe that discount will dwindle in 2017.

Financial engineering within Navios Group unlocks value hidden in the shares of NM. I don't have enough space in his column to delineate all the relationships between Navios Holdings and its listed sister companies, Navios Partners (NMM) and Navios Acquisition (NNA) which in turn holds a stake in Navios Maritime Midstream Partners NAP. Suffice it to say, each of those entities is trading at a substantial discount to NAV. While Navios Holdings already generates significant cash flows from technical management fees paid by the sister companies to the parent, low valuations across shipping sectors are suppressing value throughout Navios Group. I believe Navios' CEO and largest shareholder, Angeliki Frangou, will take action to unlock value in 2017.

So, I'm going out on a limb and predicting all three events will happen for Navios in 2017. At $1.25 the shares are undervalued by at least half in my opinion, and if last year's Navios' near double in value matures into another double in 2017, my clients and I will be celebrating our hard-earned alpha.

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