Jingle bells, jingle bells. Continuing with the tax loss selling shopping list, here are four cyclical businesses with downside protection. These companies have hedges, long term leases, or cold hard cash that are some of the ways we can have the luxury of waiting for a recovery.
Postrock Energy (QRCP, QELP): A very complex opportunity, consequence of fraud and a liquidity crisis that I hope to analyze in more detail in the future. The fraud was more limited than initially expected and the liquidity issues should be solved by a multi-merger of all subsidiaries redirecting cash flow where it is most needed: Quest Resources (QRCP). Quest is the owner of 120K+ Marcellus acres drilling rights but its only source of revenue were the suspended distributions from its subsidiaries. This complex merger is still foggy but if I am right, and might well be wrong, current prices are less than 1x FCF of the consolidated entity with substantial undeveloped Marcellus acres to boot. The best place to start your reasearch is the recently amended Postrock S4.
Global Ship Lease (GSL): Friends in Twitter are becoming tired of my endless promotion of this container shipping company with long term leases (the first expiration is in 2012). Well what can I say, a company priced at 1x FCF is worth promoting. Its main issue is the dependency on CMA CGM: its single charterer. CMA CGM is breaking even the last months while its competitors are in serious problems: Hapag Lloyd and Zim were rescued by their governments, CSAV did a very diluting equity raise, Maersk, Neptune and others have reported large losses. CMA CGM just announced an agreement with the banks for a new $500 million credit line and private investors are interested in injecting capital (Cerberus and Oaktree among others). Besides Michael Gross, the second largest shareholder and company director, has been buying GSL aggressively.
Omega Navigation (ONAV): ONAV is a product tanker company. In other words, it transports refined products in specialized ships that need special coating. Some of them are ice class so they can be used in the Arctic and Baltic. This sub-segment is beneficiary of the trends of mandatory transition to double hulk and environmental constrains to refinery expansion in developed countries. In turn, this leads to substantial expected growth over the next years that should rapidly absorb the small current overcapacity. Generating $6M of FCF last quarter and the newbuilds 75% financed, though not chartered, ONAV is navigating the rough waters of an aggressive build program. Also the Glencore counterparty risk seems under control, and even more, it is becoming a financial partner in the newbuilds program. It looks to me that the chances of a catastrophe are low given a worse case where they loose their deposits for the new vessels. And since this should not impact cash flow the current price of just 2x FCF looks like a bargain.
Remember, these are just leads for further investigation and I do not own some of them.
Author's Disclosure: Long QRCP, QELP, GSL