Buy Three Shipping Stocks and Slowly Step Away From the Rest of the Market

by: ASB Capital

To be a contrarian, you have to buy what other people aren't buying at a time that they aren't buying it. This week, I saw four great contrarian opportunities for value investors: three are shipping companies I've been following, Overseas Shipholding Group (NYSE:OSG), Navios Maritime (NYSE:NM) and Paragon Shipping (PRGN), and the fourth is cash.

In the recent economic boom, easy financing and optimistic decision makers ordered lots of new cargo ships. These new vessels are coming in to service this year and next. The glut of new ships combined with relatively weak economic activity have combined to depress ship charter rates. (Whether the global economy is weak in an absolute sense or whether it's just not strong enough to support all these ships I can't say.) Articles such as this one will appear regularly over the coming months describing the trouble in the shipping business.

Against this backdrop, it may be better to wait, but I've made initial purchases of three companies now. The first, OSG ships petroleum products. OSG's business model is to make money in the spot market. This is a risky way to make a living, but they seem to be good at it. They maintain a current ratio of almost 4.5, meaning that they have enough cash on hand to meet 4.5 years worth of obligations. At this week's price of 32-33 dollars per share, they have a price-to-book ratio of less than .5, meaning that you should be able to sell all the companies assets right now, pay off the liabilities, and be left with about 62 dollars. The dividend yield is over 5%. For more information on OSG, I recommend the analysis in posts by SeekingAlpha contributor SL Advisors.

Navios Maritime is a dry-bulk shipper based in Greece. It has more debt than OSG, but at a price of $4.90 and below, it still offers a great price-to-book ratio and dividend yield. Morningstar's write-up of the company and conversations I've had with people familiar with the industry offer a lot of respect for Navios's management, too.

My third choice is the smallest of the three, Paragon. I started buying stock in Paragon Shipping last summer at a price of 3.86 when the Financial Times's stock screener identified it as an orthodox Graham-Dodd pick. Now, it's under $3.10. Paragon has the best price-to-book ratio and dividend yield of the three companies discussed.

I'm also interested in Genco Shipping and Trading (NYSE:GNK), Euroseas, Ltd (NASDAQ:ESEA) and Diana Shipping (NYSE:DSX), but I haven't had the chance to investigate them much yet. These companies have current ratios of 2 or higher, which is important to me for two reasons. First, I hope that the cushion of cash maintained by the businesses will help carry them through the rough patch in the shipping business that may hurt their competition. Second, a high current ratio seems like a good indicator to me that the management of the company focuses on running a sound business rather than making quick profits.

My fourth recommendation is cash. I soak up every word from Jeremy Grantham of GMO, and this week he came out with another quarterly letter. He thinks the market is overvalued, but he hasn't recommended getting out per se. I agree that the market is overvalued, and I would rather be able to take advantage of a major stockmarket correction one or two years from now than take advantage of minor growth in the market between now and correction time. To that end, I'm selling mutual funds in greater amounts than I'm buying the three shipping stocks discussed above. I plan to get the portfolio to be at about 20% cash by the end of the quarter. I bought about 1% of the value of my portfolio on NM and PRGN, and I've had about 2% in OSG. I'm prepared to go as high has 3% for each, but I'm waiting for either future significant drops in the share prices or a general market event.

Disclosure: I am long OSG, NM, PRGN.

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