SBBA - J Mintzmyer's 2 Favorite Tankers

2023-12-17 11:00:00 ET

Summary

• J Mintzmyer discusses his favorite tanker stocks, Scorpio Tankers and Tsakos Energy Navigation, highlighting their strong balance sheets and potential for growth.
• He believes that the market is skeptical about the tanker industry's prospects, leading to undervalued stocks.
• Mintzmyer acknowledges the risk of a recession impacting the industry but emphasizes the strong balance sheets of these companies.

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Why J Mintzmyer really likes tankers (0:30) and specifically his two favorites, Scorpio Tankers and Tsakos Energy Navigation (2:15). What happens if there's a recession? (8:40). This is an abridged version of a recent conversation .

Nathaniel Baker: Joined today by J Mintzmyer of the Value Investor's Edge investing service that we have here on Seeking Alpha.

J Mintzmyer: So, for me, being part of Value Investor's Edge , which is our overall research platform, we founded that back in 2015. So, we have more than 8 years of experience now, exclusively in the maritime shipping sector.

We cover 44 different stocks. And so, we follow them all across the cycles. And of course at any given time, a handful of those are avoids, a handful of those are maybe watched for later, and maybe a selection are buys. And so, I just put that into context, so folks understand that we are looking at the cycles and we are looking at the different timings of things.

I mentioned tankers as something I really like, and I mentioned that I think we're in inning 4 to inning 6, somewhere between there. And when I look at the valuations of these stocks in the market, they're not deeply depressed, right?

These aren't like, total bargain basement stocks. And they wouldn't be because the cash flows are strong and earnings are strong and the balance sheets have improved, but they also don't trade with much enthusiasm.

In fact, some of these stocks trade at 20% to 30% discounts just to the NAV, which is the net asset value, which is the value of all the ships minus the debt. And that's a pretty kind of pessimistic valuation if you trade below just the carrying value of your ships. I mean that’s pretty disappointing if you trade below that. And most of them do.

And I think the broad market is just more skeptical. I think the broad market is more focused on macro things. I think they're more focused on China specifically. And I think they're a little bit less dialed in than we are about the fleet profile, the upcoming deliveries.

Like I don't think most folks really pay much attention to that until it matters, right? And so that’s – I am prefacing that by saying, like, these aren't the biggest bargains in the world, but I do think there's a dislocation.

And one of the stocks I've talked about a lot, and it’s a big position of mine. I'm publicly long. I also have some options. I'm talking my book here. Hopefully that's transparent.

It’s Scorpio Tankers, ( STNG ). And they're U.S. listed, and they have one of the largest product tanker fleets in the world. And it's all modern, and that's one of the things I like the most about Scorpio Tankers. Because they don't need to replace any of their vessels any time soon. I mean, they don't even -- they can get all the way up to like 2030s before they have to talk about fleet replacement or renewal.

And so, all they need to do is operate the ships and collect the money, pay off debt where they need to, and then return the rest to shareholders. And I think that's what they're going to plan on doing.

And Scorpio Tankers over the last year and a half has completely revitalized their balance sheet. Year and a half ago, and if you go back and look at the stock year and a half ago, it was like $15 or $13. But the balance sheet was a disaster. I mean, it was borderline.

We used to put in our research notes, like, be careful, there might be an equity raise, like these guys are in trouble. And they have completely revitalized their balance sheet. And now it's pristine. It's about 30% debt to assets. Over 500 million in liquidity. So all they really have to do now is operate the fleet.

And they're doing steady share repurchases because of that 30% plus discount that I just mentioned, right, because it's like an arbitrage. You can repurchase your shares at $0.70 on the dollar. It's basically like investing in your own fleet or growing your fleet, at $0.70 on the dollar.

And thankfully, their management understands that, and they're doing that. They've raised their base dividend a few times as well. I think there's probably special dividends in the near future. So that's number one, Nate, and I'm talking my book. I'm very long with this company, very much believe in that.

One other company, I've mentioned it publicly once or twice. It's a little bit more risky yet. This one has a little bit, I would say, of management concerns.

Not that management is going to do anything nefarious, like, there's no question of the accounts of this company. There's no question -- there's nothing like that. It’s just that it's a family kind of backed and operated firm. And so their capital allocation priorities aren't the same as, like, I would say, like, a regular company.

So, don't expect, you know, if they make a lot of money -- I'll give you a few examples. Expect them to renew their fleet. Expect them to grow a little bit. I don't expect them to pay out more than, like, 30%, 40% of cash flow. They're going to reinvest. It's a family business. They're going to reinvest in it. They're going to grow in it. They want to be in tankers for another 50 years.

And that's what I mean about, like, family concerns and related parties and that sort of thing. Nothing nefarious that I've seen. I’ve followed this company for actually more than 10 years at this point.

It's called Tsakos Energy Navigation ( TNP ). And I also have a very big position in this company as well. One of my largest stock positions, I also have some options. March 2024 is one of the strikes I'm really into right now on the options chain. But this company trades at like $20 per share. And their net asset value is $60. So, one-third…

NB : Wow. That's a huge discount.

JM : Yes. And the only reason it trades at $20 and not $50 is because of those concerns about the family and the management and all that. And I think a 60 to 70 actually, it's closer to 70 at this point. I think a 70% discount is just way too high.

If considering the issue is more that they want to grow the fleet. It's not that they want to -- they're not incinerating money. They're not doing anything illegal. They're not doing anything nefarious. If they're doing nefarious and other things, then yes there should be a massive discount.

But I would say, in my opinion, there should be a discount, Nate, but I think it should be maybe 20% or 30%, not 70%. And so, I think this is a fantastic opportunity for investors.

We've ran some cases on this company, TNP. And in an average market, next year, they're going to be worth $70. In a strong market, they're going to be worth over a $100. This is NAV. I'm not saying where the stock's gonna trade.

But in an average market, their NAVs can be about $70. In a great market, their NAVs can be over a $100 and in a terrible market, like I mean, batting down the hatches, everything goes wrong, their NAV is like $35. And the stock is $20 today. So, I just think that's an amazing thing.

So those are my two favorites. They're both in tankers. They're both on theme. We can talk more about other stuff as well, but you asked my favorites, and those are the two.

NB : Yeah. No, that's a good one. Yeah. So we got, Scorpio Tankers, STNG, and Tsakos.

JM: And I think that folks are just skeptical about this tanker market -- they don't believe it has legs. And I think that's what you're seeing in that year-to-date performance. And I hope, because I'm invested very long, I hope that if we look back in 6 months, or a year from now, we'll see that outperformance resume.

NB : Yeah. I mean, to give you an idea, they announced a stock repurchase plan, which is a buy signal for anybody, back on August 15th, and the stock barely moved. I mean, it was up a drip and then it dropped, like, a week later.

Granted that was during August, which was a bad month as was September. But yeah, anyway.

JM : If you go through their PRs and and we don't have time to do it live here on the podcast, of course, but if you go through their PRs in the last 18 months, they've done, like, 7 different huge buybacks. They've bought back about 15% of their float.

These are big buybacks that are not just token. And the market is just shrugging it off. And that can't last. That's not going to last.

NB : And so these, you think these are all macro concerns that are weighing on it. The China reopening the story chiefly.

JM : Yeah. The persistence of interest rates, the weakness of the economy in Europe, China instability. Yeah. I think that's all weighing on it. I don't think it's really related to tanker market fundamentals because it doesn't make sense.

Because if you were basing this on tanker market fundamentals, Scorpio Tankers would be 75 today and not 52. Right? And Tsakos would be 40 and not 20. I mean, so there's obviously bigger picture macro concerns going on.

NB : Yeah. And on that, I mean, stocks are forward-looking indicators, I guess. And what if the economy does fall off the cliff here, or at least enter a recession over the next 6 months to 12 months to 18 months, which seems like a lot of people are talking now could happen. What does that do then?

JM : Yeah. That's always going to be a risk. And not just for the operating performance of the company, but as investors and traders, we're looking at the price of the stocks, right?

And I'm not going to BS anybody like, if the whole market comes down significantly because of a recession, then almost all or all of the shipping stocks are also going to come down just by nature of the stock market coming down.

In terms of how much we're concerned about that, the first thing we look at is balance sheet strength. And the shipping company balance sheets on average, we cover 44 companies right now. On average, they are the strongest we've ever seen, and that's in our 8-year history.

We've also back-tested the tanker and some of the bulker companies, and they are indeed, like, the best of all time, or at least in modern history. And so right now, just to give you an example, we have one firm that has negative net debt -- net cash, which in a capital intensive industry like shipping, having net cash is totally unheard of.

We have one company that's net cash, and we have three additional companies. So, it'll be four in total that we project will be net cash by Christmas. And the average debt-to-assets across our companies is like 28% or something like that. And normally in shipping, the average is over 50%.

Which makes sense. You know, you finance a ship half debt, half cash. That's 50%. Right? And that's healthy. 50% is fine, but right now it's, like, 28%. And so the loans on these vessels are very small. And, yes, interest rates are going up, and that's a pressure, but the balance sheets are stronger than they've ever been.

So, I am not worried about, like, company ending events. If macro goes down the toilet, yes, the stocks are going to fall. That's inevitable, but none of these companies are going to have to go bankrupt or restructure or dilute their equity.

And that's what I think investors - because everybody understands, right, the rising tide lifts all boats and so forth. But what people are really scared of is bankruptcy and things like that. And that fear in my opinion is completely off the table for the next few years.

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