There's Blood in the Water, So Navios Is Buying

 | Apr 28, 2017 | 1:00 PM EDT
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Navios Maritime (NM) is going long. Again. 

The company announced this morning it had signed a term sheet to acquire FSL Trust, a Singapore-listed entity that controls 22 ships, mainly tankers, with five containerships as well. It is a very complicated transaction, but the ultimate owner of FSL is HSH Nordbank. HSH is Navios' partner in the Navios Europe partnerships, and like several other European banks is reducing exposure to the volatile shipping markets ahead of more stringent capital requirements, namely Basel III. 

Navios, on the other hand, is increasing its exposure to shipping, and that's why you should be buying the stock. Yes, that sounds obvious since Navios is a shipping company, but remember that it's just as easy for the company to sell ships as it is for them to buy them. In the past month, the Navios Group companies have been active purchasers of vessels in the secondhand market across all the major shipping categories. 

In delineating Navios Preferreds Series G (NM-G) as my Real Money Best Idea (shares have

risen nearly 400% since that call in January 2016 and it has been the call of a lifetime for me), I have often referred to Navios management as the smartest guys in the room. I'm not sure that's saying too much in the boom-and-bust world of shipping, and Navios CEO and largest shareholder Angeliki Frangou is not a guy, but the point is clear. Navios management calls the shipping markets better than any team I know, and when they are buying ships it's a signal to be long NM shares. 

Right now, clearly, Frangou and team see great opportunities in the product tanker and containership markets. Those markets are not quite as beaten down as Navios Holdings' core market of dry bulk was in the first quarter of last year, but are certainly depressed. Looking at a chart of tanker rates shows massive erosion on a year-on-year basis and the container shipping market has basically been in recession for the past three years. 

So, it stands to reason, asset prices are plummeting and in shipping, as in so many assets (read my RM column on auto stocks for another example) it is best to buy when there is blood in the streets. That is what Navios is doing, and while there is no guarantee the FSL deal will close (Navios has exclusive negotiating rights until Sept. 30) an enlarged fleet would mean more income for Navios Holdings. 

That's the genius behind Navios' corporate structure, and why I am not selling any NM common and in fact bought more this morning. Navios Holdings provides technical management services for the ships of its Group companies (Navios Midstream Partners, Navios Acquisition, Navios Maritime Partners) and charges management fees for that service. Thus, a larger fleet means a larger revenue stream for the parent. It's a brilliant setup, and it means NM's revenues are much more stable than one might guess from a glance at a chart of the always-volatile Baltic Dry Index (BDI), the main benchmark for bulk freight rates. 

I don't think the market gets that. At all. So, I continue to add to NM positions even though the stock is up nearly 50% in the past year. It's still at a deep discount to net asset value (I calculate a figure north of $4 a share), and if the FSL transaction closes, that NAV will only go higher, especially since Navios is only putting $20 million of equity in initially. 

It can be very frustrating to watch NM shares move with the ever-fluctuating BDI, but I stick with the mantra I have used for 25 years. If a valuation doesn't make sense, take the other side of the trade. There are many stocks that seem wildly overvalued to me (especially in the Nasdaq) but Navios is one of the few that doesn't compute in the other direction. So I'll keep buying more.

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