Full Speed Ahead for Navios Holdings

 | Dec 22, 2016 | 4:00 PM EST
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Navios Holdings (NM) shares are up more than 20% today as the company announced this morning that a London arbitration tribunal had ruled that Navios South American Logistics' (NSAL) 20-year contract with Vale (VALE) remains in full force and effect. It's a huge win for NSAL, which is controlled by Navios Holdings by virtue of its 63.8% holding in NSAL. 

As of Sept. 30, NSAL had invested $142 million in a port terminal in Nueva Palmira, Paraguay, a facility constructed specifically to handle this contract with Vale. When Vale decided in April not to honor the contract, it was a huge brake on NM's share price. 

To put it in perspective, the market capitalization of NM as of yesterday was $145 million. So, essentially the $142 million accrued investment in the Nueva Palmira terminal equaled the valuation accorded by the stock market to all of Navios, with its 40 owned ships and equity stakes in Navios companies Navios Maritime Acquisition (NNA) and Navios Maritime Partners (NMM)

So this is massive news. 

The ball is in Vale's court and the press release noted that Navios now has the right to terminate the contract and retains the right to file for damages in the amounts represented by the full term of the contract. That would be a massive number given the 20-year life of the agreement, and I'm guessing Navios and Vale come to a settlement agreement. 

Vale could just decide to honor the contract, which would be a much more palatable outcome for Navios than having a very expensive grain terminal sitting empty and unused. 

I'm guessing there will be more of a financial settlement between Navios and Vale, however. That would provide a cash infusion for Navios and we shareholders would ultimately benefit. 

Navios shares tend to yo-yo with the daily movements of the Baltic Dry Index. Today's news is just more evidence that there is so much more to Navios than exposure to frustratingly volatile dry bulk shipping rates. 

That's why I made Navios Preferred Series G (NM-G) my Real Money Best Idea last January. Today's move -- the prefs are jumping along with the common -- put that pick solidly back at No. 1 (the performance figures posted on the right side of the Real Money homepage are delayed by one day). As much as I love competing and once again edging out Jim "Rev Shark" DePorre's prescient International Game Technology (IGT) pick for the No. 1 slot, though, that's not what investing is all about. 

We all like model portfolios and watch lists and all that "stuff" (I was going to use another word there), but that's not how fund managers invest. The pros I talk to do a tremendous amount of due diligence on any given name, establish a fair value and hold until the market gives them a reason to sell. 

In the case of Navios, I calculate a net asset value of $4.05 for the stock. Believe me, my clients and I are really happy about today's move in NM shares, but this isn't the end game. 

It's certainly reasonable that the market would ascribe a discount to NAV, a company with so much exposure to the wild and woolly shipping markets. But even after today's move, NM shares are trading at discount to my NAV calculation of more than 60%. 

That's nuts, but in the world of micro-caps it is all too common. If you read an analyst report stating that Apple (AAPL) , General Motors (GM) or Facebook (FB) is undervalued by more than 60%, then you should be skeptical. A 20% move in any of those names (AAPL's had one in the past six months, GM is overdue for one by about 16 years) is a solid one, and you should certainly think about harvesting profits. 

In micro-caps, however, that 20% move can occur in one day (as it has for NM today) and barely covers the cost of the additional volatility versus blue chips. So we need to have higher hopes ... and higher return objectives. 

My firm is not selling Navios into today's move, and if stubbornness is a virtue, we are as virtuous as can be.

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