Shipping Still Winning the Rotation Trade

I have written several times over the past few months about the upcoming post-COVID ‘rotation trades,’ and how shipping would be a major beneficiary. The past three months have been incredibly profitable for us at Value Investor’s Edge as this theme continues to play out. More recently, we have also been buoyed by resurgence in the energy sector.

As investors are willing to return to the shipping sector, it is important to realize that many of these areas were strongly profitable throughout most of 2020, even as investors were nowhere in sight. The tanker trade was of course a very volatile adventure, but many of our favorites generated three years’ worth of normal cash flows in just three quarters, so long-term investors who are focused on fundamentals will do fine here. However, besides tankers, there are two other sectors with surprisingly resilient results during 2020, both of which are still producing incredible profits. In fact, each weekly update for the past two months has shown steady improvements.

Containership Thesis & Investment Returns

Once again (is it Groundhog Day?!), I am writing to provide an update on the phenomenal returns in containerships and LPG. Keep in mind that we published the following research update on Value Investor’s Edge on 13 September, titled: “Midsize Containers: Time to Buy and Buy Big.” The full report was several pages and included dynamics on current demand trends and the beautiful supply balance, but the key message (direct quotes from article) was this:

Strong buy alert for the entire segment as we have a unique confluence of events, most recently capped by Chinese authorities pressuring liners to *increase* capacity on Pacific routes. Panamax charter rates hit fresh 6-year record highs (last set in summer 2019). The market is tight and “virtually sold out” according to Loadstar. Opened DAC last week at $5.05, added huge to CPLP at $5.99, buying more NMCI at $0.80, added NMM at $5.95. If you want the best quality, CMRE [at $5.44] is a fine choice as well.”

I was also long a very sizeable tranche of GSL from $5.25 in June 2020. Needless to say it has been a profitable run! Despite all the misleading headlines and broad market views about shipping, 2020 is shaping up to be a very profitable year. Certainly a ‘rising tide lifts all boats’ market like 2H-2019 is more enjoyable for most, but there’s opportunity in the shipping markets, you just need a strong gut and access to superior research. Here’s a quick update on current containership trends and a bonus shout-out to the LPG rates.

Containership Update: Index at 12-year Highs

We’ve been pounding the table to ‘buy containerships’ for months at Value Investor’s Edge, and we’ve also shared several updates here in our Capital Link blogs. Some of the names to consider include: Capital Partners (CPLP), Costamare (CMRE), Danaos Corp (DAC), Global Ship Lease (GSL), and Navios Containers (NMCI). Note for disclosure purposes, I am also currently long CPLP, CMRE, DAC, GSL, and NMCI as of 14 December. Market rates are now at 12-year highs and have been holding steady in the lower-$20kpd to mid-$20kpd range for midsized Panamax vessels for the past several weeks. Most of the recent fixtures we’ve seen have trended towards longer duration 2-year deals as opposed to short-term 6-12 month fixtures. This is bullish for our firms as it means liners are more confident that market conditions will last longer, meanwhile our firms are wisely locking up strong cash flows.

The latest Harpex Index is shown below, with the latest update on Friday, 11 December:

Source: Harper Petersen, Harpex Index, 10y chart

Another Big Winner? LPG Shipping

Another huge winner that has been floating mostly under-the-radar is LPG shipping, particularly the very large gas carrier (“VLGC”) segment. As I noted in previous updates, the LPG shipping rates have been surging for the majority of the summer and Q4 profits will be enormous for all of the key players. Furthermore, there has been an exceptional recent squeeze on rates with spot quotes exceeding $100kpd for early-January cargoes. When I wrote my previous blog a month ago, in which I was very bullish on VLGCs, the rates were ‘only’ in the mid-$50s.

The mid-$50kpd quotes were outstanding for our firms! I believe Dorian LPG (LPG) is worth $18/sh based on normalized rates of just mid-$30kpd for instance. Imagine if we’re talking about $50-$100kpd rates? I hesitate the put a quote on volatile rates, but I’m just making the point that even $18.00 as a target looks quite conservative these days. For those with access to the Oslo markets, both Avance Gas (Oslo: AVANCE) and BW LPG (Oslo: BWLPG) are also strong candidates for investment. As of 14 December, I am long all three of these names and I have recently been buying more common shares.

Market Dislocation & Post-COVID Rotation

This segment is also proving what we have said for years and profited from consistently: the shipping sectors are often completely dislocated from the broad markets. Investors who can focus on the fundamentals and who have access to quality research can do quite well. The entire world is anxiously looking forward to the end of COVID-19 and we as investors are looking forward to the continuation of our massively profitable rotation trades.