We have enjoyed an exciting run YTD during 2021, with many shipping stocks surging throughout the year. In a recent report on TradeWinds, Jefferies analyst Randy Giveans was quoted as noting that “31 out of 32” of the stocks he covered were up as of Q1-21. Although shipping does not have a formal ETF anymore, we track an industry basket on Value Investor’s Edge and as of 16 April, this basket was showing gains of 22.3% YTD, not bad!
With all that said, it might be odd to title a blog, “buyers still timid.” However, given the surging rates in both containerships and dry bulk, both of which seem to have been mostly ignored by market participants over the past few weeks, it is worth bringing up again.
Notably, the same shipping index we track was much higher on 19 March (+38.4% YTD) as well as on 12 February (+39.9% YTD). In fact, if you just invested in a broad basket of dozens of shipping stocks without discretion to what you were buying, you probably lost money from mid-February to mid-April even as fundamentals are rocketing up better and better each week.
Although we have done far better with selective names at Value Investor’s Edge, the broad drag of the industry average has been discouraging and is certainly a headwind to navigate. Why is this happening?
Reopening Trades Slowed & Broad Rotation Paused
It seems that the weakness of average shipping stocks over the past two months is most closely tied to the resurgence of COVID-19 across Brazil and parts of the European Union. This seems to have cast doubts into the ‘reopening trade’ themes, of which shipping had been a major beneficiary. Additionally, the overall broad rotation from tech and growth into smaller caps and value seems to have paused, and in some cases, reversed.
We saw this very interesting price action last week as the broad indexes and huge names like Apple and Tesla were up, while the Russell 2000 was down and many small cap favorites were gutted, with a few down 10-20% on the week. Some churn has returned to the markets and ironically the new ‘flight to safety’ is into wildly overvalued tech stocks as opposed to traditional value plays.
Shipping Fundamentals: Containers Shine and Bulk Rises
Meanwhile for those who are focused on the fundamentals of the market, things have rarely been better, at least not in the past decade! Containership rates set another 15-year high last week according to the Harpex Index, with the 8,500 TEU rate tied with the previous all-time high set in the mid-2000s. The overall Harpex itself is not far off record highs (1,651 latest vs. record of 1,839). Although naysayers will believe this is just a flash in the pan, it is important to realize these are the quote rates for a one-year fixture and very similar rates are now emerging for 2-3 and even 4-year charters!
Additionally, dry bulk rates are nearing 10-year record highs, all during a time of year which is normally among the weakest. If these trends continue, we could see a monstrous summer and fall season.
Fresh Opportunity for Buyers
For those who are sticking to fundamentals, the recent 2-month pullback is a gift. For those who missed the boat last time around, there is a fresh opportunity to get back on board the best potential containership and dry bulk plays.
Although we never shy away from taking profits, and we have locked in record-levels of profits already during the past 4-5 months, at this point in time we are major net buyers at Value Investor’s Edge. Lots of selective buying opportunities across the market the past couple of weeks, and we have been focusing especially on containers and dry bulk.