September was not a great month for Prudent Speculator stocks, especially considering that our newsletter portfolios were off 4% to 5% this month alone, compared to much more modest declines of 1.4% for the S&P 500 and 2.1% for our benchmark Russell 3000 Index. Indeed, it was an awful month for the average stock, as evidenced by a month-to-date drop of 5.4% in the S&P 600 SmallCap Index and a dip of 4.6% in the S&P 400 MidCap index. And the average stock in the Russell 3000 index suffered a 5.4% setback.
For what it is worth, throughout our history, our performance often more closely mirrors what is going on with the average stock, given our broad portfolio diversification, than what is happening with the market averages. While we suspect this may be of little consolation to readers who have joined the fold in recent months, a review of our experience with our PruFolio newsletter portfolio since its inception at the end of 2000 might offer some comfort.
As the table above details, not counting this one, there have been 60 months (which would equate to five full years!) since 2000 that PruFolio has underperformed the Russell 3000 index. May not sound that impressive, but as there have been 164 months in total, PruFolio has outperformed in 104 months. And most importantly, PruFolio has outperformed over the past 13+ years by more than 900 basis points per annum! To paraphrase Warren Buffett, we'll take a lumpy 14.8% per annum over a consistent 5.7% all day long, even as we understand that past performance is no guarantee of future performance and PruFolio had the benefit of launching at a very opportune time for value-oriented strategies.
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Shares of Navios Martime (NM) have seemingly been hit by the recent sell off in small cap stocks. There is also news that Brazilian firm Vale SA had come to an agreement with China Ocean Shipping Company, or Cosco, to sell and lease back four of the company's Very Large Ore Carriers (VLOCs). These ships are often referred to as Valemax carriers or Chinamax carriers. The agreement also includes building 10 new Valemax carriers which will be leased to Vale SA.
The Vale news comes as a bit of a surprise to investors as in recent years China has not allowed Valemax carriers to dock at Chinese ports. While the official reason has always been safety concerns surrounding the structural integrity of the ships, scuttlebutt surrounding the issue has been that Chinese shipping companies, including Cosco, lobbied to keep the ships out, to support their own fleets. However, there had been rumors recently that China was considering allowing Vale's carriers access again.
The announcement of the potential new builds added downward pressure to NM shares as those ships builds could offer as much capacity as almost 75% of NM’s current fleet, and more than many of its closest competitors. That said, there is obviously no certainty about the true impact that these vessels might have as it will take some time for them to be constructed, and there are numerous dry bulk shipping jobs that do not require that kind of capacity.
While there is no doubt that this news and concerns of slowing growth in certain parts of the globe have added a new layer of headwinds for Navios, we strongly believe that the selloff of NM shares has been very much overdone and that it presents a long-term opportunity for investors to begin a new position or add to existing positions.
We like that the company has been taking initiatives to decrease its daily cash breakeven level to provide an additional margin of safety in challenging operating environments. We also like that the firm has decent contract coverage for its core fleet and ample dividend support from its affiliated companies. NM owns 20.0% of Navios Maritime Partners and 46.4% of Navios Maritime Acquisition Corp, with NM expected to receive more than $40 million in dividend payouts from the pair over the next 12 months, easily covering the dividend that Navios pays. We are also partial to the shipper’s majority ownership stake in a lucrative South American logistics provider, an entity poised to capitalize on that region’s long-term expanding economies and the resulting increase in import/export activity. It is also worth noting that this business has a 20 year contract with Vale for port services.
While we recognize that competition will heat up, and we have trimmed our Target Price for NM to $10, we believe Navios remains one of the best positioned companies in the dry bulk space, which should benefit in the long term as emerging market demand increases for the products it ships. We are positive on the fact that management maintains significant relationships throughout the industry, particularly with banks, that allow it to see distressed deals earlier than many of its competitors. Furthermore, the company has proven access to multiple forms of capital and has demonstrated an ability to think creatively with a willingness to move quickly to seize on opportunities. We are also constructive on NM’s relatively low cost operations, and its more than 4% dividend yield, of which we think there is the potential to increase over time.
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Opinions expressed are those of John Buckingham, chief investment officer of Al Frank Asset Management, Inc. (AFAM). a division of AFAM Capital, Inc., and are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.