The headlines have blared loudly in the last two months: the world is running out of oil storage; major containership operators are going bankrupt; globalization is dead; and the internal combustion engine is disappearing rapidly. Sources include the New York Times, the Wall Street Journal, and the Financial Times among many publications. The more inflammatory a story, the more likely their readers will click through. Many of these forecasts turned out to be wrong, highly unlikely or will play out over years. Unfortunately, for shipping, which is viewed by most investors as a cyclical industry tied to world trade, these predictions have been reasons to sell.
We need to add to the mix a new phenomena, the sports bettor, now day trader. According to the Financial Times, individuals who used to bet on basketball, hockey, European football and Indian Cricket, now have hours and hours to trade stocks. Robinhood had had zero trading fees, and others followed. Charles Schwab, E*TRADE and Interactive Brokers – each hit record numbers of account sign-ups in either March or April, adding 780,000 new customers. They buy stocks based on stories and on products they like. Valuation doesn’t matter, the holding period is very short term, and in a recovering market, stocks in favored sectors such as Tech just keep going up. Except for an occasional oil contango, shipping doesn’t play very well to this audience.
Right now, the market is offering considerable value in shipping. Companies are cheap on most metrics. Let’s take tankers. Companies have generated significant cash flow and are reducing leverage. If rates fall to unprofitable levels for VLCCs, it would force the scrapping of older vessels, 24% of which are 15 years or older. It doesn’t take much to move the market. A shortage of 70 tankers in October 2019 caused VLCC rates to skyrocket. The order book is low, and capital is scare. The type of power plant for the future has yet to be determined, further discouraging ordering. While one stock analyst projected this morning that tanker stock prices will fall an additional 30% based on the unwind of the contango, there are offsetting factors such as likely increasing US oil production. On May 12, Energy Transfer noted that Permian producers had already called back 25% of their frac crews. Analogous opportunities also exist in dry bulk and container shipping, where the gaps to net asset value are even more pronounced. Better yet, in many cases, an investor can be paid to wait.
Can you imagine lines of people at Sam’s or Costco for the right to pay more for a new television? Yet it seems that in investing, people are willing to pay more and more for certain companies. That’s ok. While it is not an ideal time to be seller of shipping stocks, as a holder and buyer, the values remain compelling even in today’s new world.
