Most shipping equities have enjoyed strong returns YTD in 2021, but one segment stands out among the rest for its y/y return: containerships. Since September 2021, we have seen tremendous returns across the board in these equities, ranging from a total return of about 80% on the low-end from industrial juggernaut Atlas Corp (ATCO) to a peak blowout return of 16x from Danaos Corp (DAC). The average return across the universe of containership stocks we follow is over 4x, a remarkable year!
Shipping is a tough industry to get correct for investors, and I have certainly been humbled on many occasions; however, with containerships, we were far ahead of the curve at Value Investor’s Edge. After publishing a strong buy alert to our research members in early-September, I brought the broad thesis public to Seeking Alpha on 24 September 2020. Our top picks were Danaos Corp (DAC), Global Ship Lease (GSL), and Navios Containers (NMCI). These picks have returned roughly 1500%, 400%, and about 1300% respectively (note: NMCI was merged into NMM at a ratio of 0.39x), making for a wonderful year!
Rates Setting Fresh Record Highs
Even after a record-breaking run of ship leasing rates over the past year, rates continue to move higher yet, with last Friday’s Harpex update posting another strong w/w uptick. I have compiled a chart below which shows the past five years of rates. Prior to 2021, the top of the chart was around $40kpd, so we have literally been ‘off the charts’ since February 2021. It’s worth noting that short-term rates are even higher yet: Euroseas (ESEA) unveiled a 2-3 month charter at an eye-popping rate of $200kpd earlier this month!
How Long Will These Rates Last?
What investors want to know is: “How long will these rates last?” and more importantly: “Are these stocks good buys today?”
To the first question, it’s difficult to know. I believe we are very close to the peak of rates, and my best guess would be that the cycle peaks around October-November. However, what is more unclear is how long the relative strength can last. There are remarkably few newbuilds arriving in 2022 (even less than arrived in 2021!), and there is no sign of supply chains cooling off. In fact, congestion just hit new record peaks last week. On the other hand, US ports are finally starting to take some measures aimed at decreasing the logjam, such as adding additional shifts and expanding port operating hours.
I expect rates will remain relatively strong through at least 2023, but we might be hitting a near-term peak in rates. I’ve been wrong before though! I believed rates were peaking out last March-April as well… As I mentioned in the opening, this industry humbles a lot of us on a regular basis!
Should Investors Buy Today?
This brings us to the more important question: “Should investors buy today?” I believe there is still remarkable value to be had in some of these names regardless of the near- and medium-term rate trajectories. One of my current top picks is Global Ship Lease (GSL), which has an adj. NAV of over $60/sh, yet the stock trades at just $24. Another top pick is Navios Partners (NMM), which is also benefitting from surging dry bulk and has also recently launched a bottom-of-cycle bet in tankers. On the longer-term trajectory, for folks who are looking more for a 3-5+ year investment, I think Atlas Corp (ATCO) looks enticing here. ATCO has been a mega laggard during the past year, but going forward, it offers one of the best risk/reward profiles in my view.
Finally, for the most risk-averse and long-term oriented investors, I believe it is time to load up in box lessor stocks, such as Textainer Group (TGH) and Triton International (TRTN). Members of Value Investor’s Edge have received the latest insights on these firms and I plan to bring a longer-form report/thesis public in the coming weeks.
I look forward to sharing more ideas in the future.
Note: J Mintzmyer is long ATCO, GSL, NMM, TGH, and TRTN in personal accounts.