John Fredriksen Is Bearish on Shipping but Sees Opportunity

Includes: FRO, SFL
by: Power Hedge

Norwegian-born Cypriot shipping tycoon John Fredriksen stated in a recent interview in Oslo that he expects the tanker market to collapse "within a year or two." Mr. Fredriksen is the chairman of Hamilton, Bermuda-based Frontline Ltd (NYSE:FRO) and is an individual whose name most shipping investors likely recognize. Mr. Fredriksen, who acquired the bulk of his estimated $10.7 billion fortune in the shipping industry and who once controlled a fleet that was eight times the size of the one controlled by the late Greek shipping magnate Aristotle Onassis, is certainly a voice that no investor should ignore.

Investors in shipping stocks have been terribly disappointed by their returns over the past three to five years. The shipping industry hit a peak in 2008 and since that time has been in decline as the entire shipping industry has been plagued by overcapacity and low spot rates. This has caused profitability of companies all over the industry to tumble. Share prices quickly followed. Fredriksen's Frontline, for example, has fallen from a peak of more than $70 per share in 2008 to less than $20 per share today. Here is Frontline's three-year stock price chart.

(Click to enlarge).

Source: Fidelity Investments

Despite these already heavy losses, Fredriksen says that the worst is yet to come. He stated that it will be "one or two years" before the market "collapses." If Mr. Fredriksen is correct and history suggests that he probably is, then investors in Frontline or other shipping stocks are likely to suffer additional losses over the next few years. It may be advisable to avoid these equities for the time being while the market stabilizes and works off its excess capacity. Those who are determined to invest in this sector may want to consider another of John Fredriksen's companies, Ship Finance International Ltd (NYSE:SFL). Ship Finance is less exposed to the collapse in spot prices that Mr. Fredriksen predicts.

Frontline is positioning itself to take advantage of the market collapse that their visionary chairman sees coming, although it is likely that the company will suffer some pain over the next few years. Frontline has some of the strongest financials in the industry and plans to leverage that to expand its fleet once the industry bottoms out. "We'll wait until the market collapses and then we'll buy up what's there," says Fredriksen.

The CEO of Frontline appears to agree with Fredriksen's long-term view of the industry. Mr. Jens Jensen bought 14,000 shares of Frontline stock on June 3, 2011. It is difficult to tell an insider's exact motivation when trading stock (other than to make money) but I find it very unlikely that he does not share Mr. Fredriksen's bearishness on the overall shipping market. Most likely, Mr. Jensen is betting that Frontline's plans to expand at the bottom of the shipping market will succeed. This appears to be a very long-term play.

An investment in a pure play shipping stock appears to be dead money at this point in time. Mr. Fredriksen's comments seem to indicate that investors could be best served by avoiding the sector for the next year or two. Once the industry works off its excess capacity and possibly consolidates somewhat, shipping stocks may become a better investment. Frontline is positioning itself to be one of the strongest companies coming out of the industry's troubles and will likely be a strong buy at that time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.