(Editors' Note: This article covers stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks
When the market is at all time highs, it can be a challenge to find stocks that are undervalued. Shipping is one industry that is in the early stages of recovery. Finding winners will mean big gains in the years to come.
The way I see it, shipping stocks are in the third inning of a doubleheader. All shipping companies have suffered over the last several years, with most companies still trading below 2009 levels.
Here are three companies that I believe have the potential to double over the next twelve months. The first is Nordic American Tankers Limited (NAT), amazingly enough, this company has paid a dividend for 65 consecutive quarters, totaling over $44 a share. At the current share price of $8.20, I believe it is significantly undervalued, barely trading at NAV. The company owns 20 Suezmax double hull vessels used for transporting oil. Since August of this year, rates have gone from a low of around $5,000 a day to over $48,000 a day, and yet the stock price has barely moved. This 9 fold price increase should go a long way to stabilizing earnings, and allowing a continuation of the dividend.
The CEO recently wrote an open letter to shareholders, which I found to be quite refreshing. You can view that letter here. Nordic American Tankers Limited has several positive developments in the works.
In November, the company announced the creation of Nordic American Offshore Limited, (NAO) the company owns and operates 6 supply vessels with an option for a seventh. It currently trades on the Norwegian OTC (over the counter) market with Nordic American Tankers Limited as its biggest shareholder, holding 26% with a $65M investment. The company plans to go public on the NYSE during the first quarter of 2014. The CEO suggests that this should help the company increase its dividend in the future.
According to a recent article from Hellenic shipping, the "Suezmax" order book is almost nil for the near foreseeable future. A rebalancing between demolition of ships over 15 years old and a pickup in transports from Africa and India to the East is seen as a catalyst for stabilizing rates.
In 2012 to present, 15 of the 20 vessels have undergone surveys to the tune of $40 million in cost. This was done at a time when rates were low; only two vessels are scheduled for survey in 2014. This will help the company achieve higher gross revenue. Nordic American Tanker has a strong balance sheet, with only $6.4M net debt per vessel. Their cash to break even is $12,000 per ship, very low for the industry. With only 250M in debt and 303M net working capital, this company is well positioned and well run. It's important to note that after depreciation, the company was cash flow positive 2.48M for Q3. The CEO is committed to the dividend and responsible management of debt. That is a difficult quality to find in the shipping world. With the recent dramatic rise of 'Suezmax' rates, this company could be a big winner in 2014.
Dianna Shipping Inc. (DSX) and DryShips Inc. (DRYS) are two other companies I believe will be big winners next year as the economy continues to improve. Dianna Shipping with 36 ships on the water and 4 remaining to be delivered in 2014 is the safer play. They have a strong balance sheet, holding $315.7M in cash; the company is well positioned to continue to make timely purchases of vessels at reduced prices. In Q3 Dianna posted a loss of only 3.2M, which was quite impressive considering the massive losses other shippers were reporting. The street is expecting a return to profitability, and with several contracts expiring next year, earnings will continue to improve. The stock has already doubled from the bottom earlier in the year, but I feel we are just getting started. The BDIY recently touched new highs at 2337 and it's becoming obvious that the long term downtrend is broken.
With only $403M in long term debt, Dianna Shipping could make a big play to distressed shippers facing bankruptcy, possibly picking up several ships on the cheap. Experienced responsible management, a strong balance sheet and momentum could make this a great addition to your portfolio.
Genco Shipping & Trading Ltd. (GNK) is trading at $1.83 down 26% since my article on November 18th, about their debt issues. They are in talks with creditors and still have $1.54B on their short term balance sheet. Eagle Bulk Shipping, Inc. (EGLE) trading at $3.07, is struggling under debt and a tightening of covenants as evidenced by the 10-Q filed November 14th. Although they may survive, there are other far safer investments.
My third pick to double from here is DryShips Inc. This one time high flyer went from $134 to $1.46 in a period of 5 years and is currently trading at $3.58. Massive dilutions, conflicts of interest, fears of BK, and the worst shipping cycle in our life time brought this company to the brink. The CEO has a reputation of being unfriendly to shareholders, and I for one have to concur. However, because of CEO George Economou's calculated risks, and what I think was a brilliant move into the ultra-deep water drilling space, DryShips is alive and has huge potential for significant gains in the future.
DryShips currently has 18 of their "Panamax" on spot. The significant rise in rates this quarter to over $16k per day will help to increase the company's earnings going forward. They also have four Suezmax new vessels on spot, and are poised to reap the benefits of higher rates.
Of all the shippers that I follow, DryShips is the only one that has increased its top line revenue in the last three quarters. Why? Investors are beginning to understand the potential value of Ocean RIG UDW, (ORIG) a pure play on ultra-deep water drilling. The company owns 59.4% of the ultra deep water driller. Ocean Rig UDW has nearly $6 billion in contracts, with 10 new state of the art drill ships. I feel this is the main reason this Shipping company could be a big winner.
DryShips quarterly revenues blew out analysts estimates coming in at $404 million for the quarter, with a mere $76 million coming from voyage revenues. Shipping fundamentals are improving, the company reported Brazilian and Australian iron ore exports up 15.8 percent from the same period a year ago, while Chinese iron ore imports increased 16.9 percent and coal imports up 21.4 percent respectively.
DryShips has a mountain of debt, and that has been an overhang on the stock, but with $1.5B in yearly revenue, and rising rates, they could finally be leveraged at the right time to maximize profit.
On the conference call, the CEO George Economou stated that Ocean Rig UDW will be forming an MLP and distributing a cash dividend of $25 million per quarter starting in the second quarter of 2014, $13M of that will go to DryShips. Recently the company announced the suspension of the $200M ATM; you can read about that in my previous article here.
With rising rates, a dividend from Ocean Rig UDW, and a potential stock buyback announcement, this stock could double over night. A $10M buy in by the CEO at the current price and all would be forgiven. The street is watching Mr. Economou closely, and with a little help, ready to forgive and forget. Another important factor is this: DryShips has been held back from announcing any share buybacks because of debt restrictions. We are looking for some follow up on the relaxing of covenants and the reduction of funding needs through 2014.
DryShips is now a deep water driller and shipper combined, although the companies are separate, DryShips owns nearly 60% of Ocean Rig UDW. If you think oil stays around $100 a barrel and we keep consuming, then you may want to be in this potential multibagger.
In shipping, there will be winners and losers. We are at the beginning stages of a long term run in shipping. Do your own research, make sound unemotional decisions, and remain flexible to a changing environment.