Unlike the market as a whole, the inflation trade is carrying on…
Since the lows of the pandemic back in March 2020, investors seem to have been solely focused on tech, crypto, and any other high-flying asset they can get their hands on.
FOMO – fear of missing out – as Jeff Clark has discussed, has been a market force.
Although bitcoin and other crypto markets are holding up, tech is getting crushed under the weight of overvaluations and the fear of a stalemate in Washington – and investors seem to be cashing out in droves.
But, as I went over last month, the market as a whole is actually not in a bubble…
Here at Market Minute, we’ve been continuously bullish on the inflation trade, calling it the trade of the year.
And when we saw the opportunity, we recommended titanium dioxide producer Tronox (TROX) in August. Since then, it’s risen 38% while the S&P 500 fell more than 3%.
These types of returns are still available in the market, but will come from areas that no one really wants to talk about. They aren’t as sexy as crypto, and don’t create FOMO.
After all, no one wants to talk about titanium dioxide at the water cooler (if they even exist anymore), and that’s just fine…
Because at this point, the CRB Commodity Index is quite simply running away from the S&P 500. Its lead over the market is now in the double digits…
And at the forefront of this trend has been shipping rates, rising 280% this year alone…
Yet some stocks in this sector have recently fallen out of favor. One in particular is trading at its lowest price in years.
Just like titanium dioxide was overlooked in the market then, this commodities company may be primed for even higher gains.
Clearly Undervalued With a Great Chart Setup
Shipping rates have been at the forefront of the inflation theme this year…
The Baltic Dry Index is now up 280% this year alone.
However, not all shipping rates are the same…
The Baltic Dirty Tanker Index is up “only” 35% this year.
This big difference in rates has investors focused on shipping companies that specialize in transporting dry cargo rather than “dirty” energy.
But, the trend in energy shipping is about to accelerate just as Nordic American Tankers (NAT) is trading at a multi-year low.
To dive deeper into why that is, let’s first calculate NAT’s valuation through a variety of factors…
To start, NAT has a fleet of more than 15 tankers, but a market cap right under $500 million.
Those tankers are the biggest line item on its balance sheet and are estimated to be worth around $830 million. In addition, it has around $90 million in current, liquid assets like cash and receivables. Together, that totals around $920 million in assets.
Its debt stands at around $370 million, which are mostly long-term obligations.
The difference, or $540 million, is actually $50 million more than its current market cap. Meaning, the market is valuing NAT solely based on the value of its ships and not its ability to generate cash.
That view completely undervalues NAT and sets up a very low-risk trade.
Now, a simple rule of thumb to get a ballpark estimate of how much a business is worth is to apply a 5X multiple to earnings before interest, taxes, depreciation, and amortization (EBITDA).
At next year’s projected EBITDA of $139 million, that comes out to a minimum valuation of around $700 million (139M x 5 = 695M) – or 40% more than where it’s currently trading.
Another way to look at this is how it’s valued relative to its peers. Currently, NAT trades at 5.7 times next year’s EV/EBITDA, while its peers trade at about 7x… so it’s at least 20% undervalued in comparison.
Keep in mind, these are “back of the envelope” techniques of looking at a company’s stat sheet, but it’s always a good idea to know how this stacks up against what Wall Street is thinking.
As we did with TROX, Wall Street analyst estimates are a great tool to know when to buy, since they form a great trading range to work with.
However, I get most excited about the opportunities to profit when a stock is completely out of that range…
Take a look at where we stand right now with NAT…
It fell out of the range, but not for long…
Right now, it’s at the bottom of that range, with a median target price of $3.73. That’s about 30% higher from current levels and presents another 20-40% worth of upside.
But, I think, these numbers are a bit light.
Beauty is in the eye of the beholder… and valuations are no different. The reason, though, is more behavioral than scientific.
As the market loses faith in overvalued tech companies and realizes that commodities may be the trade of next year too, both analysts and investors will get more excited about these types of companies.
As usual, they’ll raise price targets and the retail crowd will begin to notice… it’ll be hard to miss 40% gains, while the broad stock index falls further.
Meaning that when NAT rises to its median price target and gains 30%, it will just be a pitstop on its way to doubling from current levels.
Contributing Editor, Market Minute