Is now the time to be buying shipping companies?

I’m a big follower of shipping companies. My grandfather worked on Liberty Ships during World War 2 for Bethlehem Steel, and so you might say that floating steel is in my blood. But it’s definitely a sector of stock investment where you can lose a lot of money, and as you can see in the graph above from 2010 onwards, it’s been a fabulous way to lose a lot of money.

There’s a couple of things to note here. First, many shipping companies are highly leveraged, but many also pay a healthy dividend, too. If, as most shipping companies seem to intend, they intend to return a majority of their free cash to their shareholders, then the dividend should be high and the overall stock price should not necessarily reflect the total return.

Clearly, over the past 5 years the Invesco Shipping ETF fund has lost 10% every year on average in total return, but it currently pays a dividend after expenses equivalent to roughly 2.71%. And for 2019, it is up 10%.

There are going to be times of extreme weakness, and individual stocks within the sector can be expected to declare bankruptcy. In fact, depending on the company, major shipping company families appear to have a reputation for diluting the interest of common shareholders again and again. So why would anyone invest?

Because it’s also a sector that is poorly followed, and because it has (from time to time) shown returns well in excess of doubling or tripling your money in a short time frame. In essence, it’s a gamble, but one that has high payouts. And because it is poorly followed and thinly invested, I think it’s one where the opportunity for making a market-beating return are at least possible, unlike the average large cap company. But it’s a matter of knowing when to buy, as well, and there’s no formula.

I first became interested in shipping during the first bull market in shipping companies which happened right before the global investment crisis of 2008–2009. And, of course, I’m following the company that got created from buying the shipping assets of the former Bethlehem Steel: Navios.

Navios has gone from wildly overvalued to wildly undervalued many times in the course of 15 or so years. It’s hard to tell (except after the fact) when’s the best time to buy or sell this kind of company, but I had re-established a position earlier this year when it was trading at nearly $2/share, split adjusted, after it had to execute a 1:10 reverse split in January.

So the question is, it’s it a time to sell, or is it a time to buy? Is it fairly valued, or undervalued, or overvalued and heading down?

A strong component of the profitability of shipping companies comes from the cash rates they can get from companies seeking to buy their capacity. And, this is subject to basic supply and demand. But shipping companies have to invest a sizable amount of capital in the operation and… the steel, to supply a ship. Looking at the graph above, there’s a story that is often told: there’s an excess of supply, and demand is restricted, so prices have been depressed for well over 5 years. Generally speaking, in my experience, the typical cost to supply a ship is something on the order of 800–1200 on the index line above, though there are companies whose expenses are above or below that line. And, as you can see, if you wanted to participate in the market, many times in the last 5 years you had to sell your supply at less than cost. 2014 onward has been a slow slog downward.

What this meant for lots of companies is years of losses. Bankruptcy for many.

But in early 2019 this has seemed to form a bottom. Why do I think this is a bottom? I thing a major reason for the doldrums up until mid year have been obvious: there’s a trade war currently underway between China and the US. But suddenly, the markets have begun to turn around, and there’s a couple short term reasons for this, too. Hope of an end to the trade wars. Reduced newbuilding. And from what I can gather, the IMO 2020 regulations that have restricted sulfur emissions after January have caused a lot of companies to invest in either retrofitting scrubbers onto their ships, or planning to get low-sulfur fuel to use in their engines. The companies that have survived the recent downturns are likely to continue to survive. So I’m modestly bullish right now. Please note- this is not a recommendation to buy or sell, and there is substantial risk in investing in equities and options.

So what does my portfolio of shipping stocks look like, right now?

I’m currently long SEA (an ETF that broadly covers the shipping market, including dry bulk, oil and gas, and containerized shipping), and I think it’s a buy below $9/share. I hold 200 shares at a cost basis of $8.80. I think it’s likely if we see the trade war continue beyond March of next year, we will revisit the lows again, and we’re not likely to see too much of the temporary bump from constrained supply due to IMO 2020 last much beyond that point. So theres lots of good reasons to cool your heels for now.

Im also trying to keep a somewhat equal dollar amount of the major players in each of the following four sectors- I’ve skimped on buying individual shares of some of those that are duplicated in SEA, and I’m not sure I have a good formula for an ideal coverage of the following stocks by market share and weight. But here’s a nice list of all of them in one place. Note again: these are not recommendations to buy, and this is not intended to be a comprehensive list and may be subject to errors. This list doesn’t include many of the major players exclusively listed on non-US markets, including some (like COSCO, AP Moller Maersk, and Mitsui OSK) which don’t have well traded ADRs or dual listed shares.

Diversified Players

In addition to the SEA ETF, there are two diversified plays on the market trading as independent companies: SFL, and NM. I’ve discussed Navios above. In addition, I’m trying out selling some long-dated cash covered puts and covered calls on my NM position, selling $5 puts when the price drops near to there and selling $7.50 calls when the price nears this upper target.

Container Shipping

In the containerized shipping sector, there are five major players, including SSW, CMRE, DAC, NMCI, and MATX

Dry Bulk

In Dry Bulk shipping, there are 9 major players, including SBLK, GNK, GOGL, SALT, DSX, EGLE, PANL, SB, and NMM

Oil Tankers

Among the Oil Tankers, there are 10 major players, including STNG, FRO, EURN, TRMD, TNP, TNK, NNA, NAT, OSG, and TOPS.

I haven’t included here companies like KEX, which mainly does river transport on the Mississippi river, nor offshore service tankers like TDW, nor the major drillers, and finally, not the LNG tankers, either.

You have to draw the line somewhere, and these are the major players that I’m trying to keep an eye on. The purpose of this page is kind of like a “lab notebook” of my experiments in investing in the shipping sector.



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