30 Aug 2021

Navios Marine Acquisition

This company, which is in the business of supplying all sorts of ships, had had a bad run lately. Over the last few days it has recovered. Its financials are a bit suspect. It has recently an at-the-market offering, which is favoured by the more … speculative stocks. Well, this sort of capital raise didn’t harm Tesla, so maybe it’s OK for NMM. You can read the latest SA piece here. It is certainly a very speculative bet.

Everything is an option

On a discounted dividend model, a company that earns nothing is worthless. But this is not true in the real world. A company that owns a goldmine which is not producing anything, because it’s marginal cost of production is less than the market price of gold, is not worthless. It is an option on gold prices rallying. The value of this sort of option is related for how long the options is available to be exercised, the volatility of the underlying (gold) and the current market price, together with the cost of extraction.

A lot of companies in the stock market are like this. They make no profits, but they may just be the next Apple. The vast majority will not be, of course, but a small investment in a lot of them might just be worth the investment.

Unfortunately, it’s very hard to have a good model for this sort of value. It’s not just a question of using Mathematica rather than Excel. It’s that the inputs are just known unknowns.

Of course, it’s not only stocks without income (or, in some cases, without revenue). It’s every stock. SPACs have exploited this approach. The twist is that you pay the premium before you even know what the underlying is. But you receive a put, which you can exercise, to get your money back if you decide you think the option is overpriced.

It seems that the regulators think that SPACs look a bit too much like regular investment funds, but with fees which break the rules for this sort of product. Bill Ackman has come up with an idea for getting around this that seems pretty good to me. He’s offering investors in his original SPAC nil-paid transferrable rights which can be exercised when he announces his target acquisition. You can read a bit about this here. There was a good article about this in the Economist this weekend, but it’s paywalled.

Market update

Markets are still trending sideways. The plunge in oil has reversed. Some international indexes have recovered. There seems to be some evidence that the backwardation in oil futures is closing. It doesn’t make sense to me that a few years out you will be able to buy oil for $54 a barrel. We’re not close to running the economy on wind power yet.

Normal service will be resumed soon.