For many investors, the stock market currently feels like a risk play. With the macro picture dominating, any bet is essentially a bet on the economy as a whole. Correlations between individual stocks are historically high, making a macro-economic call pivotal to almost any investing decision that doesn't use sometimes complicated pair trading strategies to eliminate market risk. With even elite economists disagreeing wholeheartedly about the economy's trajectory, that makes investing a tough call: whom to believe? Thankfully, however, there are some companies whose long term profitability is almost independent of the broader market. One such company is Odyssey Marine Exploration (NASDAQ:OMEX), which I believe is a buy at today's prices regardless of how the European debt crisis ends up.
Odyssey engages in "commercial under-water archaeology," meaning they search for, find, recover and sell valuable cargoes from shipwrecks dating from the 1600s to modern times. They had their first major success in 2003, finding the S.S. Republic, a side-wheeled steamer that sank in 1865 carrying a cargo of coins destined to aid in the post-war reconstruction of New Orleans. Odyssey recorded 51,000 coins worth $75 million from the wreck, and has already netted more than $40 million in revenue from the sale of those coins. Then, in 2007, Odyssey discovered the shipwreck of the Nuestra Señora de las Mercedes, a Spanish frigate sunk in 1804, and recovered 500,000 gold and silver coins found lying on the ocean floor, the result of an explosion that destroyed the ship. Unfortunately, after a protracted court process, it appears the coins will be returned to Spain, due to a marine principle known as sovereign immunity. Odyssey didn't slow down in the interim period, discovering the HMS Victory (1744), a first-rate British ship of the line reportedly carrying a massive cargo of gold in the English channel, during 2008. Due to the nature of the ship as a war-grave, it appears unlikely that Odyssey will be allowed to recover the treasure (its very existence is contested), however recent examinations of the site have revealed trawler damage that gives Odyssey significant leverage, especially given the fragile nature of European government finances.
This need for funds is an excellent segue into Odyssey's most recent and most important (for this investment thesis at least) find to date. In the fall of 2011, Odyssey announced that it had discovered the wreck of the SS Gairsoppa, a British steam ship sunk during World War Two carrying up to 7 million ounces of silver ingots bound for India. More importantly than the find itself, Odyssey had a pre-negotiated agreement in place for the Gairsoppa (a lesson learned from the Black Swan case) allowing them to keep 80% of the proceeds from the wreck. They are spending the winter preparing a vessel and crew to recover this cargo, which at current market prices is worth roughly $200 million. After recovery expenses, costs from recovery-dependent financing, and the British government's take, Odyssey should make (200*.8-11-30)*.925= $110 million from the operation, with recovery and sale costing $11 million and Galt Resources making 4X their investment ($30 million) and 7.5% of the rest (another $10 million, roughly). Given Odyssey's current market cap of $173.5 million and low debt, this is transformative for the company. As an added bonus, unlike coins, silver ingots can be sold easily and quickly on the spot market, lowering costs and giving Odyssey a quick cash boost.
On the whole, then, the Gairsoppa recovery essentially accounts for 2/3 of Odyssey's current market cap all on its own. If the price of silver increases, of course, that value could increase further. None of this is a compelling case that Odyssey is undervalued, but once other projects are considered, it becomes clear that this is the case. The technology Odyssey will use to salvage the Gairsoppa is new (military in origin) and has never been used to recover treasure at this depth before. This allows Odyssey to open an entire new realm of the ocean floor to their business, including many shipwrecks much like the Gairsoppa, sunk during the World Wars. In addition, the cash from the Gairsoppa will finance Odyssey's operations for at least half a decade to come, giving them a truly dominant position in their industry and absolving them of the need to dilute shareholders for capital.
Though Odyssey is often secretive about their projects due to the allure treasure has for unscrupulous third parties with their own dive equipment and the ability of anyone in the world to track their vessels using AIS, they have said publicly that they expect up to 3 additional recoveries in 2012, beyond the Gairsoppa, and they also announced in their latest quarterly filing that they "are also planning the excavation of one of our confirmed high-value targets during the coming year." Though the market shrugged off the news, likely due to its lack of specificity, the fact that they have confirmed another high-value target is news that does not appear to be reflected in the current stock price, especially since "high-value" in Odyssey's corporate parlance means more than 100 million dollars. In particular, Odyssey has unabashedly been searching for the Merchant Royal, a famously rich shipwreck sunk off of Cornwall in the 17th century carrying a treasure worth half a billion dollars or more. Finding the Merchant Royal or any other high value shipwreck is huge news for Odyssey, and even one additional recovery beyond the Gairsoppa should be enough to double the share price from here to $5.00/share.
With up to three planned and, after the spring, millions of dollars with which to execute their strategy, Odyssey is uniquely positioned to break through this year in a way that its shareholders have been hoping for for some time. What's more, the pending Gairsoppa recovery promises to mitigate potential losses until the spring, as Odyssey is waiting for clear weather to return to the site. Until then, Odyssey's stock should truly be unsinkable no matter what the market does, though investors should keep a close eye on the price of silver. With little downside thanks to the Gairsoppa, massive upside from other projects and a dominant position in an industry with huge barriers to entry, Odyssey is set to do well no matter what the market does, making it an excellent dose of adventure and potential profitability suited for any portfolio.