Shipping Stocks Look Good for Extreme Value Investors

There is a recent New York Post article that we'd like to briefly discuss today. It concerns ships at anchor just out of Singapore and is titled "Recession Anchors Trade."

I think it is symptomatic of modern journalism. Mixing reporting of facts, not reporting some relevant facts, and just the right touch of scaremongering.

In a faraway corner of the Pacific is anchored the world's ghost fleet of cargo ships as far as the eye can see, with no cargo, no crews -- and no place to go.

The out-of-work fleet -- larger than the combined navies of the US and Britain -- stretches for 20 miles off the coast of Malaysia as an eerie symbol of the recession's wipe-out of world commerce.

Economists say that normally these 500-plus container vessels, oil tankers and merchant ships would be steaming between the ports of Asia and the US laden with cameras, jeans and all sorts of goods for retail shelves this Christmas. Instead, the mammoth ships have been moored for months, with only a guard or two on decks to watch for marauding pirates.

We are then shown a dramatic photo of rather a lot of ships resting at sea.

In such articles there is always "analysts predict" or similar which is then usually accompanied by a doomsday like statement, "By 2012, one in four commercial ships will be idle", in this case.

Let's be completely frank here, the situation is not good. Looking at the current valuations of US shipping companies shows the median price to book ration is just over 1x. The market has priced in considerable downside and there may be yet more to come.

Such articles are easy to write; the journalist makes a few observations backed up by a quote from a "source". We are not criticising the journalist here; he was getting good copy to print and the article is definitely newsworthy. If it scares off casual investors, then that's fine by us.

"Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell” - John M. Templeton

Or to put it another way - "buy low, sell high".

I do have a little local knowledge, having visited Singapore often with my parents from mid-1970s onwards and many times in my own business career. My goodness, have things changed.

Most who have flown over, or landed in, Singapore in the daylight will have seen similar pictures, depression, boom time or in-between. Singapore is a massive trading hub and there are pretty much always many, many ships in a similar position.

Let's take a look at some technicals. We think that the global shipping ETF (SEA) is showing encouraging signs of a breakout.

With a p/book ratio of 0.90 and a current dividend yield of 6.66%, this ETF must look attractive to contrarian traders, speculators, and long-term value investors. We have spent considerable time over the last few months examining the fundamentals of the companies that make up the SEA ETF as well as other complementary ETFs. We recommend that you do the same.

This is not the sort of trade we would recommend putting the whole portfolio on, nor entering in a leveraged fashion. With this sort of trade we don't expect to time the market perfectly and will ride out the short-term ups and downs. Sometimes we exit with a loss, but more often than not we exit in considerable profit. From the outset, our horizon is at least 2 years and possibly may turn into 5 years or more.

We allocate a portion of our funds to such long-term trades in sectors that we feel are undervalued in the long term. We have entered this a few months ago and are scaling our positions up over time.

P.S. There have been a few queries with respect to our spelling. To these people I would like to say that it has been an absolute pleasure introducing you to English as written in England (spoken it's a different matter 'innit).

Disclosure: Long SEA

Comments

[bdp1Consult...:]

Fahgetabout it (Brooklyn spelling).

Lots of mixed metaphors from the NY Post- a font of business knowledge for sure. There are different types of ships, the companies are not all the same, so I would shy away from vehicle encompassing all the sectors. But, yes, the industry is worth buying into.

The container guys (toys, electronics) may be waiting longer than drybulk guys (who already saw a pleasant and unexpected pickup this year) or tanker guys (where trade flows can shift dramatically in short periods of time).

Notwithstanding the above, in the container sector, I like SSW (huge Chinese exposure) if you insist on the consumer angle. In drybulk (rocks being loaded into boats), EGLE or DSX, and in tankers (crude oil) GMR.

Sep 22 11:40 AM

[poor&unempl...:]

This was my post about SEA on October 12, 2008.After which SEA had lost another 50% of it's value. Is it time to unload again?
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SEA: Stable Returns in a Choppy Market? [View article] Investing in shipping sector is not as simple as it sounds. Most of the time people are swept with the tide and confuse it to understanding the business.

Shipping is similar to real estate - floating real estate.

Sectors include - raw materials, construction, residential, commercial, leisure, homes, apartments, rental buildings, malls, office buildings, warehouses, land, management, brokers, insurance, .... virtually every sector in real estate has a peer in the shipping.

CNBC labeled SSW’s stock movement the “Christmas indicator” due to the high percentage of consumer items that are transported by the company. _ THEY HAVE NO IDEA WHAT SO EVER ABOUT WHAT THEY ARE TALKING! MAY BE THEY HAVE NOT HEARD OF COSCO, AP MOLLER (MAERSK), HAPPAG, HAMBURG SUD, CMA-CGM, HANJIN. THESE COMPANIES CARRY/CONTROL MOST OF THE CONTAINERS IN THE WORLD.

Seaspan vessels are leased to above players on contracts like many other. Many of Seaspan vessels are on lease back deals. They purchased the old vessels from likes of Maersk and leased them back for a few years. (it is opposit of lease to purchase)

COSCO, MAERSK, HAPPAG, EVERGREEN reflect on actual container cargoes.

IMHO - SEA is a vehicle to unload shipping shares to unsuspecting investors.

Look at the bath this sector has taken in past 6 months.

Oct 12 17:31 pm |Rating: 0 0 |Report abuse |Link to Comment

Sep 27 06:37 PM