Baron Nathan Rothschild may or may not have actually said "buy when there's blood in the streets, including your own," but it is a great quote for investors interested in maximizing profits. As a value investor, the problem is that sometimes things just look too darn good.
Aug. 23, 2018 would seem to fit that paradigm, especially for a U.S. investor. As global stock market performance in 2018 ranges from mediocre to disappointing, the U.S. has stood out as a beacon for large fund investors. Yes, the FAANG stocks continue to bite, and growth is paramount to domestic fund investors. There is room for other modalities for patient investors, though.
The market was only slightly less "FAANGed" in January 2016, when I named Navios Maritime Preferred Series G shares (NM-G) as my Real Money Best Idea. At that time, the preferreds were trading at a ridiculous 14 cents on the dollar, and fears of Navios' demise proved to be unfounded.
Those preferreds have soared nearly 300% since and I still have the number-one slot on the RMBI table, despite stiff competition from Paul Price, Jim DePorre and the rest of Real Money's legion of ace stock-pickers.
Dry bulk markets have recovered dramatically since January 2016 and that sector's key indicator, the Baltic Dry Index, today sits near a 52-week high. The BDI is often taken as measure of global economic activity, and there is no doubt that world GDP growth has accelerated in the past two years.
But ol' Nate Rothschild told us to buy when things are bad, didn't he? How can one do that now? Where is the blood? It's not in Cupertino, Seattle, Palo Alto or any such corporate enclaves. There is some blood on the trading desks in Shanghai and Shenzhen, but I still think Chinese stocks have more downside from current levels.
But Navios gives us a clue, and that's why one of Navios Maritime's (NM) sister companies, Navios Maritime Acquisition (NNA) , is my new Real Money Best Idea. While NM derives most of revenues from shipping dry bulk commodities, NNA's fleet is entirely composed of tanker ships. NNA's fleet includes seven massive crude carriers (VLCCs) as well as 26 refined products tankers (medium range and long range) and two chemical tankers.
Blood in the Water?
The oil tanker market has been absolutely destroyed thus far in 2018. According to industry source Clarkson's, VLCC rates averaged $6,159 a day through July versus $17,794 for all of 2017, $41,488 for 2016 and $64,846 in 2015. Yes, shipping rates do move that far that fast, but one might be puzzled by the move in rates as oil prices have improved, especially demand for oil. Oil demand has grown steadily for the past few years and is estimated by the International Energy Agency to continue to do in the second half of 2018 and 2019.
Sentiment toward oil shippers began to sour in November 2016, when OPEC first announced caps on production. Time has shown that that was an overshoot by the cartel, however, as production in Venezuela has declined dramatically and Iran has come under sanctions. So, OPEC wisely decided to relax production caps in its June 22, 2018 meeting.
NNA President Ted Petrone noted on Wednesday's earnings call that volumes leaving the Arabian Gulf have increased strongly the past two months, and I believe the June OPEC meeting was effectively the bottom for tanker demand.
Oil inventories are also an important indicator for tanker demand, but unlike oil producers oil shippers thrive during periods of rising inventories. Inventory restocking drives demand for incremental cargoes and also makes arbitrage trades more profitable.
According to the IEA, oil inventories in the OECD have recently fallen below their five-year average after a steady plunge in the two years since their peak in July 2016. I believe that augurs further restocking, which will help rates for shipping both crude and refined products.
Hitting an inflection point in supply in any shipping sector -- just as happened in dry bulk in February 2016 -- is predicated on one factor: scrappage. When owners are desperate enough to sell their ships to scrappage yards in India, Pakistan and Bangladesh, that's when supply changes from a negative to positive.
As of last week, 9.5 million deadweight tons' (DWT) worth of VLCCs had been removed from the market in 2018, compared with 4.2 mm DWT of removal for all of 2017 and 0.6 mm DWT of removal in 2016.
An additional positive factor on the supply side is a spate of environmental regulations that require tankers to accept lower-sulfur fuel by 2020. This will either require completely new power plants or retrofitting emissions cleaning devices (scrubbers). Either way it's expensive and has been an added impetus for the scrappage that we have seen thus far in 2018 and that I believe will continue into 2019.
So, we've hit a bottom and NNA is a perfect way to play the upside.
Checking All the Boxes
When you are looking for down-and-out Rothschild play you need to find:
- A dirt cheap valuation relative to current net asset value (NAV), which presumably will increase as rates do.
- Sufficient balance sheet strength to not only weather the downturn, but also opportunistically buy assets on the cheap.
- Some form of cash return to hold you over until the stock market figures out a sectoral recovery is under way.
NNA checks all three boxes:
- Navios had $1.343 billion of assets on its balance sheet as of June 30 versus $1.023 billion of debt. So that's a per share NAV of $2.22 versus the recent $0.56 NNA stock price, a 75% discount.
- NNA had $52 million of total cash (equivalent to 36 cents per share) on its balance sheet at June 30, and has made an offer to purchase with stock the 41% of affiliated company Navios Maritime Midstream Partners (NAP) that it does not own.
- On Wednesday, NNA declared a cash dividend of $0.02 for September (implying a 15% annual yield) and has repurchased 7 million shares thus far in 2018.
So, NNA is a perfect way to play a rebound in the torn-up, discarded and beaten-down carbon-fuel shipping sector.
It's my Real Money Best Idea, and hopefully staying within the Navios Group will be as lucrative with NNA as it has been with NM-G.
