The decision of whether to follow GSA Capital’s lead may lie in the manager’s investing approach.
Norwegian Cruise Line Holdings (NCLH 0.10%) is a company on an upswing. After surviving an extended shutdown during the COVID-19 pandemic, it began relaunching its ships in 2021, and passengers have returned over time. As a result, bookings have hit record levels, and its stock has risen.
To this end, the company has attracted increased interest from institutional investors, with GSA Capital Partners increasing its stake in the stock. However, does that mean that the average investor should follow its lead?
The GSA Capital purchase
GSA added 1,889 shares of Norwegian in the first quarter of 2024, taking the total to 21,922 shares. Nonetheless, investors should understand that this is not a new position for the investment management company, and its trading behavior is difficult for outsiders to understand.
It began investing in Norwegian by buying more than 73,700 shares in Q2 2023. That increased by approximately 13,500 shares in the next quarter before the position dropped to just over 20,000 shares by Q4. Since 13F filings only show transactions, we do not know the reasons for these trades.
Now, with the purchase in Q1, the Norwegian position is growing again. However, this seemingly erratic trading behavior leaves investors questioning whether they would want to follow GSA Capital into (or out of) the cruise line stock.
Additionally, investors should consider its overall position size. At current prices, its Norwegian holdings are worth about $435,000 as of the time of this writing.
Still, investors should remember that the fund owns more than $1.25 billion in assets and over 1,550 stocks. Also, its largest position, Progressive Corp, makes up only 0.4% of the portfolio. Thus, GSA Capital is diversified to the point that no one stock makes much of a difference to its future.
Moreover, it owns around 43,800 shares of Norwegian’s largest rival, Carnival Corp. With those shares worth more than $800,000, GSA Capital has invested significantly more capital in a different cruise line company.
Does Norwegian make sense for investors?
In addition to GSA Capital’s overall portfolio, investors should look more closely at Norwegian itself. As mentioned before, the cruise company benefits from record bookings, and indeed, revenue rose 20% in Q1 to $2.2 billion. Much of that gain came from an 8% increase in capacity. Also, since the company limited operating-expense growth, it earned a net income of $17 million.
Unfortunately, that profit was a result of income from foreign exchange. Its $218 million in interest expenses negated its $218 million in operating income.
Also, interest will continue to be an ongoing problem due to Norwegian’s $14 billion in total debt. Most of that debt came from its prolonged shutdown during the pandemic and remains a tremendous burden given its $362 million in shareholders’ equity. In comparison, Carnival’s shareholders’ equity is $6.8 billion, though it carries more than $30 billion in total debt.
To Norwegian’s credit, it reduced total debt by $309 million in the latest quarter. Still, it faces almost $1.6 billion in principal repayments for its long-term debt this year, with $1.3 billion due in 2025. Since principal repayments will exceed those amounts every year for the rest of the decade, one has to assume Norwegian will have to refinance some of its debt at higher interest rates.
That burden will probably weigh on earnings for years to come. If bookings stay strong, the company may successfully carry that debt. Still, this shows how vulnerable Norwegian’s finances would be should another crisis occur.
Should investors follow GSA Capital into Norwegian?
Considering GSA Capital’s investment approach and the state of Norwegian itself, investors should probably not buy Norwegian stock.
Admittedly, given its record bookings, Norwegian appears set to improve its financial situation. Nonetheless, it is only one of more than 1,550 positions held by GSA Capital. Even a worst-case scenario would have little impact on GSA Capital’s returns, and realistically, few investors will want to own so many stocks, even if that is feasible.
Furthermore, the fact that GSA Capital holds a larger position in Norwegian’s most prominent rival, Carnival, indicates it has more confidence in that stock. This suggests investors should not choose Norwegian, even among cruise line stocks.