In Market Selloffs, Remember the Difference Between 'Cheap' and 'Lower'

 | Feb 02, 2018 | 4:01 PM EST
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On a trading day like today's, it is helpful to remember the difference between cheap and lower. The majority of stocks are lower today, as one would expect with the Dow Jones Industrial Average down over 500 points, but how many are really cheap?

Ultimately the price of a company's equity should reflect the discounted future earnings power of assets. In many industries it is possible to calculate that asset value based on metrics such as replacement cost. If the earnings power of the asset is less than the equity market value, then Benjamin Graham would tell you to buy it.

But another famous stock jock, Peter Lynch, noted that the worst mistake a value investor can make is to convince himself that a stock that is down cannot go down further. That's always possible.

So, to buy on days like today, you have to be convinced the market is offering you an opportunity to buy assets at below fair value.

In my Real Money column yesterday, I mentioned the oil tanker shipping stocks as a group that had been annihilated in the last two weeks of trading. Well, they are not performing any better today, but is this a situation where Ben Graham's advice is more relevant or is this one where Peter Lynch's advice should be heeded?

Again, it all comes down to the value of the assets. Sharp-eyed readers will notice that I had no ownership disclosures on yesterday's column about the incredibly cheap oil tanker stocks.

Today I do, and it's because I brought out the handy envelope and did some calculations. Navios Maritime Acquisition (NNA) will report 4Q results next Wednesday and so the most recent data is for the period ended Sept. 30. As of Sept. 30, NNA's balance sheet showed $1.264 billion in vessel value versus $1.021 billion in long-term debt. Netting out net cash and the current portion of long-term debt (which equates to a net asset of $5 million) produces a net asset value (NAV) for NNA of $248 million. On a share base of 150 million the equates to an NAV/share for NNA of $1.65.

As I write this NNA's trading at $0.77, which is an all-time low as well as, of course, a 52-week low. Anyone who wants to get into a propeller-head discussion about the value of NNA's holdings of other assets in the Navios Group (which are not included in the $1.65 NAV listed above) and the proper discount to be applied to an oil tanker stock at this point in the shipping cycle can e-mail me at jameskirkcollins@gmail.com. For everyone else it is sufficient to know that no company in any sector should be trading at a 55% discount to the value of its assets, and Navios Maritime Acquisition shares are not just lower (much, much lower) but also really cheap.

So, I bought some.

Is today the absolute bottom for NNA shares? I have no idea, but I have learned through bitter experience that the technical concept of "support levels" is completely useless when analyzing microcap stocks. Navios Maritime Acquisition is certainly a microcap today, but as industry fundamentals improve I believe the oil tanker group -- I also mentioned Nordic American Tanker (NAT) , Scorpio Tankers (STNG) , Teekay Tankers (TNK) and Frontline (FRO) in yesterday's column --will revert to some kind of realistic discount to NAV.

That makes those stocks a trading buy, and if you can handle the volatility, they have the potential to produce asymmetric returns for long-term holders.

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