Balanced Skepticism is Healthy for Shipping

We have enjoyed an exceptional run in our shipping investments over the past year, but even after containership rates are surging to all-time record highs and dry bulk rates are also pushing decade-highs, there is a significant amount of skepticism in these markets.

This skepticism is evident by containership names which still trade at huge discounts to NAV and wildly low EV/EBITDA levels of just 3-4x. Dry bulk names trade at marginally higher levels, but even these stocks are very sensitive to daily spot rate levels and have not yet attracted meaningful institutional interest.

If anything, we are seeing continuing exits from legacy private equity holders ranging from Centerbridge and Apollo selling down at Genco Shipping (GNK), to Kenon trimming at Global Ship Lease (GSL), and to Deutsche Bank and other holders recently trimming their stakes in Zim Integrated Shipping (ZIM).

Although some might decry the level of skepticism and bemoan the huge valuation gaps, I argue this represents a healthy market for these stocks. Investors should be pleased that skepticism remains at higher levels, since this means there is the potential for enormous institutional buying further along in the cycle. If everyone was already maximum bullish and all institutions were already long (as opposed to almost nobody long), then the upside would be far more limited.

Top Opportunities in Containerships

I recently posted a full-length report on Seeking Alpha, which highlights this significant valuation disconnect in the containership markets. This report addresses five major misconceptions about the markets and these particular stocks and concludes with my two top picks: Danaos Corp (DAC) and Global Ship Lease (GSL).

The chart below shows the latest rates courtesy of Harper Petersen. Keep in mind these are 1-year rate estimates, but we have been seeing very similar levels for 3-4 year deals as well:

These solid long-term fixtures and bullish liner company positioning affirms my viewpoint that this run is set to continue throughout at least the rest of this year and likely well into 2022. By that point, firms like DAC and GSL will be able to roll most remaining charters and will have secured meaningful charter coverage into 2024, 2025, and even into parts of 2026. These are multi-year growth and income stories and the institutions haven’t started to buy in force yet.

Balanced market skepticism is healthy. It allows for better buying opportunities for investors now, while keeping future buying support available as fundamentals continue to improve.

Disclosure: As of 14 June, I am long ATCO, CPLP, DAC, GSL, and NMM. Markets are volatile and positions may change at any time.