It Is the Schmatta Business Short-Term

Returns to shipping investors, more so than other industries, are heavily influenced by expectations and factors.  You can do everything that is possibly correct and still lose money.  Stocks with net cash and excellent management will underperform if the market believes that charter rates have peaked and are falling.  The opposite is also true.  The best time to enter a sector may be when rates are depressed, and ship owners are losing money. Stocks will sometimes react to falling charter rates and maddeningly enough, they won’t.  To use a Yiddishism, short term shipping stocks are the schmatta (English: rag) business.

It brings us to the discussion of dry bulk and tanker stocks.  Rates are terrible for capes right now, at $3,700 per day. These are levels not seen since May and June 2020. Yet the dry bulk stocks have performed well with names up 15% year to date.  We have seen discussions both through sell-side research and Twitter of individuals who say that dry bulk and product tanker equities are overvalued and maybe even shorts. Some of the same individuals are saying the liner and container ship lessors are undervalued. If you looked solely at rates and balance sheets today, you would heartily agree with those with those outlooks. They may be right short term.

However, we disagree, looking forward six months. The differences are the reopening of China and European refined product sanctions going into effect this weekend.  If China reopens aggressively and invests in infrastructure, they will need iron ore.  Much of it will come from Brazil, benefitting dry bulk.  There are those who say ultimately product tanker capacity will drop by 5% to 10% if the sanctions are strictly applied, due to longer ton mile journeys.  These stocks are not like Meta, where there are levers which a CEO can pull to enhance profitability, such as reducing staff.   You do get smart management teams like INSW who used down cycles to acquire Diamond S. Investing in shipping equities requires a fundamentally different type of investment analysis for the long-term investor, but then again, that is half of the fun.