Fair Is Fair

“Fair is where you take your pigs to be sold in the fall at the Texas State Fair,“ as goes the old Texas platitude. In equity investing right now, it is all about momentum versus value. If a company’s earnings and revenues are increasing, and growth is sustainable, the company’s stock price is handsomely rewarded. Valuation doesn’t seem to be matter when it comes to popular stocks.  Consequently, we have companies such as Rivian (“RIVN”), with a market cap larger than GM although they have built fewer than 125 trucks.  On the other hand, cyclicals are very cheap. This past week we bought an EV Charging Company at 37.5x forward Price/Sales and an unlevered steel company on Friday at less than 2.0x 2022e EV/EBITDA. We are tempted to say it is not fair.

This makes it a tough environment short term for many shipping equities, despite trading at compelling valuations. The stocks are cheap on metrics such as net asset value and price to earnings ratios. The challenge: few analysts are predicting that charter rates will return to 2021 peaks in containers or dry bulk. We shouldn’t be surprised by the market’s reaction. Cyclicals usually trade at low multiples of peak pricing.

If it were a conventional shipping cycle, we would agree. However, there are new paradigms, especially in dry bulk and tankers. In a world where Los Angeles, a major US port importation hub, will require zero port emissions by 2030 while no such shipping technology currently exists, we will not get the usual supply responses. As ships age and new vessels are not being constructed quickly enough to replace them, and shipyard prices are rapidly moving higher, charter rates will rise over time. We say this with humility. In July, we felt brave stating our opinion that the containership cycle was not over. If we’ve learned anything in the last two years, charter rate predictions in shipping are a mug’s game.