Dry Bulk Pair Trade: Buy Star Bulk Carriers, Sell Scorpio Bulkers


  • Star Bulk Carriers and Scorpio Bulkers are nearly identical companies - both operating in the distressed dry bulk shipping markets.
  • Both companies have relatively weak balance sheets (D/A in the high 60%), both companies are poised to burn cash in 2015, but both also offer strong upside in a recovery.
  • However, SBLK has higher upside (90% vs. 62% in a medium recovery) and is more likely to survive. SALT shareholders could lose all upside to dilution and forced asset sales.
  • SALT management has made some massive blunders and the related-party management structure brings up potential conflicts of interest. SBLK has a stronger relative operational history.
  • SBLK's fleet of 96 vessels is fully-funded whereas SALT faces serious concerns about its ability to complete its newbuilding program.

Intro & Quick Pitch

Seeking Alpha recently announced a significant pair trade contest, with entries due by June 21st, and I am excited to enter my favorite trade idea: long Star Bulk Carriers (NASDAQ:SBLK) and short Scorpio Bulkers (SALT).

In a nutshell, these companies serve a virtually identical market mix with similar large pro forma (fully delivered) fleets. SALT has a slightly more modern and efficient fleet, but any vessel efficiencies will be offset by SBLK's larger scale. The key differential between these two companies is their operational position. SBLK's expansion is fully funded, and they have sufficient equity and operational capacity to continue weathering a downturn longer than SALT. Meanwhile, SALT still faces questionable newbuild delivery prospects and is facing sizable operational losses for 2015 and 2016, further hampered by a poor managerial decision to time-charter in a substantial number of vessels. If the current market continues, SALT will be forced to throw away a large portion of their remaining upside potential via massive vessel sales and will continue their horrific dilution trend. Meanwhile, SBLK will also suffer, but their better operational scale will prevent a similarly-sized meltdown. SBLK's large on-the-water fleet will continue to provide potential upside in case of a sooner-than-expected recovery. SBLK's future cash flow potential is much stronger than SALT's potential when the recovery finally occurs.

Based on a superior fleet delivery potential, operational scale and history, upside potential, and institutional support, I recommend Star Bulk as a strong candidate for a pair trade against Scorpio Bulkers. While I am personally only participating in this trade via a long position in SBLK, I believe a SALT short provides an excellent candidate for a pair trade for those who are adequately capitalized and can accept the corresponding risks.

Other Pair-Trade Candidates

It's difficult to assemble a

This article was written by

J Mintzmyer profile picture
The ultimate shipping and logistics platform.
BS in Economics, MA in Public Policy (International Economics), pursuing Doctoral in Public Policy (Intl Relations). J is an established independent research provider and hedge fund consultant in the maritime shipping sector.

Mintzmyer founded Value Investor's Edge, a top-ranked deep value research service in May 2015, with the goal of establishing a top-tier community of deep value investors and activists. Value Investor's Edge subscribers leverage exclusive in-depth analytic reports and community investment experience to discover disconnects in global shipping and a variety of other beaten down sectors.

As part of directing Value Investor's Edge, Mintzmyer works with a team of five analysts and data technicians to deliver quality research and analytics to over 500 members. He has interviewed numerous management teams at public maritime firms, and has worked with a multitude of investors. Mintzmyer's exclusive analysis has received frequent 'Top Idea,' 'Must Read,' and 'Small Cap Insight' awards at Seeking Alpha and he is commonly cited in industry news such as TradeWinds and Splash 24/7.

Pursuing a Doctorate in Public Policy (Intl Relations) from Harvard University. M.A. in Public Policy, with focus on International Security & Economic Policy from the University of Maryland. Distinguished Graduate of the United States Air Force Academy with a B.S. in Economics. Extensive background in financial analysis, equity research, accounting, portfolio management, and customized asset allocation through nearly a decade of formalized education, personal studies, and practical experience. Avid reader of business/investments and biographies.

Legal Disclaimer: Any related contributions to Seeking Alpha, or elsewhere on the web, are to be construed as personal opinion only and do NOT constitute investment advice. An investor should always conduct personal due diligence before initiating a position. Provided articles and comments should NEVER be construed as official business recommendations. In efforts to keep full transparency, related positions will be disclosed at the end of each article to the maximum extent practicable. The majority of trades are reported live on Twitter, but this cannot be guaranteed due to technical constraints.

My premium service is a research and opinion subscription. No personalized investment advice will ever be given. I am not registered as an investment adviser, nor do I have any plans to pursue this path. No statements should be construed as anything but opinion, and the liability of all investment decisions reside with the individual. Although I do my utmost to procure high quality information, investors should always do their own due diligence and fact check all research prior to making any investment decisions. Any direct engagements with readers should always be viewed as hypothetical examples or simple exchanges of opinion as nothing is ever classified as “advice” in any sense of the word.

Disclosure: The author is long SBLK, DRYS, NM, STNG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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