In 2008-9, as shipping stocks raced for the moon, they were on everyone's radar. Now, they are trading at a fraction of their 2008-9 prices, and are barely noticed.
That's where investors can go hunting for fallen angels (stocks that have been out of favor for a long time).
In the Wisdom of Value Investing: How To Profit On Fallen Angels, Gabriel Wisdom suggests that investors look at three forces that create fallen angels: business cycles, one-time calamities, and market crash-panic. I will add one more: technology shifts.
Business cycles that usually last anywhere from three to five years create fallen angels tend to occur among the cyclical sectors of the economy, like automobiles, capital equipment, commodities, and energy and materials - all of which contract as the economy goes into a contraction, and rise as the economy recovers.
The table below gives a sample of companies that may be considered as fallen angels in the current slow growth environment. DryShips (NASDAQ:DRYS), for instance, was trading north of $100 in 2008, but now is trading near $2. Tsakos Navigation (NYSE:TNP) was north of 30 in 2008, but now is trading around $5.
One-time calamities are events that temporarily affect the performance of a corporation, e.g., an accident that disrupts operations, the shortage of an important material, or a legal dispute that create one-time fallen angels in a particular industry. That was the case with BP (NYSE:BP) a few years ago, and Boeing (NYSE:BA) more recently.
Market crashes are sudden and precipitous declines in an asset or a group of assets that create fallen angels across the board. The table below gives a sample of companies that may be considered as market-crash fallen angels at this point. Freeport-McMoRan Copper & Gold (NYSE:FCX), for instance, is a fallen angel in the recent crash of the copper and gold market. Telefonica (NYSE:TEF), Banco Santander (NYSE:SAN) and National Bank of Greece (NYSE:NBG) are fallen angels of the European market crash.
Technology shifts, like the development of new products and processes that replace old ones, create fallen angels in the technology industry. The above table gives three companies, BlackBerry (NASDAQ:BBRY), Nokia (NYSE:NOK), and Apple (NASDAQ:AAPL), which have been fallen angels of the technology shifts in the smartphone industry.
How can investors separate fallen angels from falling angels in the shipping industry?
The Four Forces That Create Fallen Angels
British Petroleum, Boeing.
Banco Santander, National Bank of Greece .
BlackBerry, Nokia, Apple .
I usually look at three criteria: hefty operating margins, positive revenue and earnings growth. If a company manages to have high profit margins and positive revenue and earnings growth when the industry is in contraction, it will survive the contraction, and eventually thrive as the industry turns around.
Obviously, one company, Navios Maritime Partners, meets these criteria. A diverse operator of dry cargo ships, NMM enjoys a 37.42 percent operating margin and a 4.80 percent quarterly revenue growth. In addition, NMM pays a hefty 11.71 percent dividend.
The secret? Long and medium leases that have sheltered the company from the wild fluctuations in the Baltic Dry Index. That's not an accident. NMM is run by an experienced management team (Frangos family), which holds a 20 percent in the company. The Frangos family furthermore has a long tradition in the Greek shipping industry - which leads the world shipping industry, both in terms of number of vessels and tonnage.
Nordic American Tankers
Navios Maritime Partners
Navios Maritime Partners
Quarterly Revenue Growth (yoy)
Quarterly Earnings Growth (yoy)
Operating Margin (%)
Return on Assets
A few words of caution: Investing in fallen angels is always a high-risk proposition. That's why it is appropriate for aggressive investors.
Bottom line: Business cycles, one-time calamities, market crash-panics, and technology shifts create fallen angels all the time. But due diligence is required to separate the fallen from the falling angels.