Post COVID Rotation: Time to Buy Shipping?

With the US elections recently concluded, we had a very interesting trading experience in the markets last week as vaccine enthusiasm from Pfizer (PFE) combined with post-election volatility reduction led to a massive rotation back towards value-oriented stocks. On Monday alone (9 November), much of the sector was trading up between 6% and 20%, and much of this momentum continued into Tuesday. There was a similar surge in most energy stocks as well.

The important thing to note is that *if* this rotation continues, both energy and shipping stocks are due for massive continual gains. We only closed about 10-15% of the YTD rotation gap this past week (i.e. comparing relative gains of tech-heavy Nasdaq to the small cap Russell 2000 or energy sector ETFs), so if you believe enthusiasm will continue to improve, then it is absolutely time to buy shipping names!

Which Sectors Benefit the Most? Containers & LPG

The majority of shipping sectors are well positioned on a value-adjusted basis (i.e. they are all dirt cheap, so it doesn’t take much of an improvement to make significant profits); however, a few areas in particular have outsized valuation propositions while still benefitting from strong current cash flows.

The best overall segment is one that we’ve been pounding for months at Value Investor’s Edge: containerships. There are many names to choose from, all of which still have meaningful upside to our fair value estimates. Capital Partners (CPLP), Costamare (CMRE), Danaos Corp (DAC), Global Ship Lease (GSL), and Navios Containers (NMCI) are the primary candidates. Note that I am currently long CPLP, DAC, GSL, and NMCI as of 16 November and I’ve been recently trading CMRE (significant gains during September and October). We’ve hosted the management teams of CPLP, CMRE, DAC, and GSL at Value Investor’s Edge for exclusive interviews and I hope to release some of these to our podcast in the coming week. Big picture: market rates are the best they’ve been in over a decade and the strength looks set to continue. If you’ve snoozed on this upside so far, it’s not too late- most of the stocks have barely started moving!

Source: Harper Petersen, Harpex Index, 10y chart

Another niche sector to highlight is LPG shipping, particularly the largest ships: very large gas carriers (“VLGCs”). These shipping rates have been surging for the majority of the summer and Q4 profits will be enormous for all of the key players. There are three major firms: Avance Gas (Oslo: AVANCE), BW LPG (Oslo: BWLPG), and Dorian LPG (LPG). I am personally long AVANCE and LPG and expect to see enormous gains as the market wakes up and realizes how well these firms are performing compared to the beleaguered stock prices. LPG stock has heavily correlated with crude tanker stocks despite having a completely separate market dynamic.

Time to buy tankers on deep value?

Finally, we come to the topic of 2020s most volatile shipping segment: crude & product tankers. These stocks have now been left for dead by the market, but if we’re moving into a post-COVID world in 2021, the underlying oil markets should rapidly rebalance and we can return to the favorable overall supply/demand balances we enjoyed in late-2019. Analysts have been slashing their price targets, but Q3 earnings have mostly been better than expected and concerns about cash burns have largely been exaggerated. I believe now is a great time to allocate funds to this sector, but keep in mind this is a much longer-tailed recovery play. The near-term winners remain the aforementioned containers and LPG shipping firms.