Over the past decade, shipping stocks have probably been the
worst investment out there. Many stocks went bust, some are down more than 90%
and the Shipping ETF (SEA) is down 70% since its 2010 peak. Given that shipping
stocks were even higher in 2007, the carnage is even worse.
Source: Yahoo Finance SEA
Here is the video for those who prefer watching videos.
There has been a rebound up to 2014, but then there was a
sharp drop in prices up to January 2016 followed by a slow, but sure,
capitulation where the SEA ETF has been steadily losing ground since 2017. Is
it time to invest now?
Adding to the pain of the sector is the sector abandonment by
investment banks. Six investment banks have closed their coverage on shipping
stocks. This means that there very low interest from investors, not even to
justify paying a few analysts to do research.
So, most investors have lost money over the last decade.
Such a performance creates an environment where everybody has had enough,
capitulated on all the bullish theses and there is absolutely no interest from
institutional investors whatsoever. Only the die-hard investors, those that
have been in shipping since ever, have remained. Is it time to invest now, at a
point of total pessimism? Will pessimism lead to great opportunities? Is it
time to be greedy when all others are not even fearful anymore, but simply crossed
shipping forever? Well, let’s dig deeper, after all, without shipping, there is
no oil, steel, grain, and consequently 99% of the things we enjoy!
Investments like Amazon, Google, Facebook, Apple have all
done great over the past decade. But you can live without all of them and you
probably did live without them just 10 years ago. Well, you can’t live without
shipping as it transports the food you eat, the oil you consume, the metals we
use, fertilizers, cars, and many other things that we can’t even think of. The
following is an illustration of where do smaller vessels navigate across the
So, without shipping, the world would stop. Let’s see
whether we can make any money on it.
It is normal that the shipping industry works in cycles.
When shipping rates are low, there is not much interest and the number of ships
built is smaller. This should lead to a ship supply crunch that should lead to
higher prices. Consequently, higher prices lead to more ships being build, more
supply and again, lower prices. Thus, shipping is a typical cyclic industry.
The main problem when it comes to investing is that there is
absolutely no competitive advantage. If you make money, somebody else will see
it, built a new ship, probably a better one than you have, and try to eat into
your profits. Low interest rates allow for easy financing and therefore the
competition is fierce.
A company like Maersk, that is the global leader in the
business, has had a return on invested capital of just 2.2% in over the first
half of 2019.
A bad environment leads to low dividends that further pushes
investors away. But, as smart investors, we have to look forward not backwards,
this gives us an advantage over others.
The following presentation chart from Golden Ocean (GOGL)
shows what are the risks and rewards when it comes to shipping. Companies could
do well if there is more stimulus and continued growth in China, if the new
fuel regulation (IMO 2020) increases costs and if more older vessels are
scrapped (happens only if fares are low which is again a negative). On the risk
side, a global recession would create an oversupply situation and put most
shipping companies into negative earnings territory. Further, the world might
also be changing, it is expected that we will need less coal (depending on
China and India), less oil in the future and less of those things that made
shipping strong over the past cycle.
Shipping companies have a positive view and invest consequently.
Therefore, the increase in shipping supply is always close or higher than
demand. In such a situation it is hard to make money.
Some sectors are hit more than others, and dry bulk (transporting
commodities), offshore oil drilling and tankers have fared the terribly since
2010, also thanks to the oversupply in the late 2000s. Only liners did ok but
that is still a terrible performance compared to the S&P 500.
And the negative returns happened despite the fact that
global trade volume grew over the past 10 years alongside GDP growth.
Source: Clarkson PLC
A positive thing to keep in mind is that if emerging markets
continue to grow and reach developed country levels, demand for commodities
etc. will grow extremely high and shipping should do well if they stop building
that many ships.
But this is the long-term environment, the short-term
shipping investing thesis is interesting. Plus, when it comes to shipping, you
make your money in one year and make up for the 4 years you broke even or lost
money. All you need to do is to get into the sector before the good years start
as those will not last long.
There is a convergence of positive factors the industry is
promoting; less ships coming into the market, new fuel regulations, slower
speed for environmental reasons and longer shipping routes. I’ll use the oil
sector example but it applies to other sectors too.
Everybody in shipping would love to see regulation about
lower speed. This would suddenly create the need for many more ships and the actual
effect on the environment would actually be the same. In the mean-time, those
owning ships now would make a lot of money.
The level of sulphur in fuel has to be below 0.5% from 2020,
instead of the current 3.5%. Companies can either buy more expensive clean fuel
or install expensive scrubbers that cost between $2 and $5 million per ship. So,
cost of doing business should go up but also many ships should be offline while
the scrubbers are being installed. Those with new, fuel efficient, ships should
have an advantage.
If there is more demand for ships than supply, prices spike
and that is why you want to invest in shipping, because when prices spike, the
shipping sector makes a lot, a LOT of MONEY. For example, if charter prices
increase from the current lows, to the 15-year average, a company like
International Seaways (INSW) that is currently trading at $19 per share, would
make $4.46 in earnings in a year. That is a PE ratio of just 5 for a historical
average. If prices jump to the 2008 peak, the company could make its current
share price in one year of earnings. That is the promise that shipping stocks
are selling today.
DryShips is an excellent example of how shipping works. The
business didn’t do well over the past years and now, when most is lost, the CEO
will simply take the company private and tell you good bye at a miserable price
compared to past levels. So, if you invested in the company, averaged down, the
CEO just took all your possible upside. Knowing shipping, there is always huge
Further, investors in Frontline (FRO) didn’t do really well
over the past decade. But the majority owner, Friedriksen, still holds a big
chunk (42%) of the company and the market capitalization didn’t change much. It
was $2.3 billion in 2006 and now it is $1.8 billion.
Another problem with shipping is that ship owners understand
the risks of the business and they know they should never have all their eggs
in one basket. So, they always diversify and they always keep a lot of cash
aside so that they can buy on the cheap when possible. Further, they prefer to
play with other people’s money than with theirs, if possible. The thing is that
when things turn bad, it quickly becomes a very negative spiral. If you have
debt, you probably have debt covenants. You usually breach them only when you
don’t have money and exactly at that point, your creditors usually ask you for
more money. Usually also the best time to dilute existing minority shareholders
and own more for less.
Source: FLEX LNG Anuual report
So, before investing in shipping, keep in mind that the
environment is and will always be crazy.
As a value investor, it is hard for me not to look at
shipping currently. So, I have now gotten an overview of the sector, I will now
look at 7 stocks that I picked from my list of stocks that I researched. Then,
I’ll cover the 3 most interesting and when there is a real great opportunity
for 1000% upside with, as always, 100% downside or hopefully less, I might
For now, there is a little bit too much optimism in the
industry so I’ll wait for IMO 2020 to pass, for a global slowdown, and then
look for my picks.
Nevertheless, tomorrow I’ll give you an analysis of FLEX
LNG, that is in a positive sector with LNG and well positioned to take
advantage of long-term trends.
Before you even start thinking about investing in shipping,
I strongly suggest reading two short novels, by author Matthew McCleery, an
expert on shipping. ‘The Shipping
Man’ and ‘Viking
Raid’, in that order. Aside from being funny and enjoyable they will tell
you, everything you need to know about the industry.
In short, the following is what we need to look at:
Moving parts when analysing the shipping industry:
Overcapacity, depending on global economic
growth, can make prices go down.
Fuel costs (IMO 2020 implementation)
The shipping war – competition and lower costs
Technology and development – automatization
Age of ship and cost advantage
Amazon shipping (sea vessels, not prime)
Climate change, new versus old routes – Panama,
Factors to consider when analysing a shipping business:
Market cycles for the specific shipping sector
Liquidity of the company, debt levels
Ownership and owner’s interest – limited
partnerships are often horrible
Freight and charter rates (spot or long-term
Ship size and location
Daily running costs
Fuel (bunker) costs
Cost of building ships, selling price of ships,
Scrappage value of ships
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The opinions expressed – imperfect and often subject to
change – are not intended nor should be taken as advice or guidance. The Sven
Carlin Stock Market Research Platform is not an investment advisor or
financial advisor. The Sven Carlin Stock Market Research Platform provides
research, it does not advise. The information enclosed in this article is
deemed to be accurate and reliable, but is not guaranteed by the author.