Lucrative Opportunities Present In Volatile Sectors Of The Economy - Revisited: An Update

Includes: GSL, SB, TNP
by: Norman Roberts


This three-month update concerns Safe Bulkers and Global Ship Lease, each representative of a battered sector of shipping: drybulk and container carriers.

Happily, both have performed exceeding well during the past three months, at least according to the increased price of their common and preferred shares.

However, as a preferred investor, I am concerned about their ultimate viability, of which I remain uncertain.

Let's see how Global Ship Lease (NYSE:GSL) and Safe Bulkers (NYSE:SB) are performing six months after my initial report on March 9, and the June 2, 2016, update, "Lucrative Opportunities Present In Volatile Sectors Of The Economy - Revisited."

Though I hope you will read the original linked article in full, my bottom line assessment of Safe Bulkers and buy recommendation at the time were as follows:

Currently, the preferred pricing of the B series is $23.50, the C series $12.20, and the D series is $11.51. The B series is priced much higher because as a result of a covenant default, dividend payment default, or a failure to redeem clause its rate of interest will be increased. This is similar to an issue that arose Tsakos Energy Navigation (NYSE:TNP) preferreds, whereby I chose the D as the best buy particularly because of its price as opposed to the value of the fail to redeem clause. In fact, because of the large disparity in price, I believe SB's C & D series are by far the best buys, consequently, for those of you holding the B series, I suggest that you sell them and replace them with either the C or D. All pay $2/share per year, but you will be putting approximately $10.00/share in your pocket, thereby reducing your exposure and increasing your effective yield. A no-brainer as far as I'm concerned.

Although the B series price remains as first reported, C and D have modestly appreciated, pretty much as I had anticipated and in line with my prediction. Consequently, as I previously reported, this is a moderately risky investment that should be treated accordingly.

Regarding Global Ship Lease, I made the following recommendation:

Currently, GSL-B is trading at $13.50, a full dollar above its price when I made the initial report

As with SB, GSL's numbers, although encouraging, signals it is far from being out of the woods, and as yet cannot be considered an entirely safe investment. Yet it is one definitely worth watching while keeping a close eye on the shipping industry as a whole and container shipping in particular.

Let's see how SB's commons have performed over the past quarter since I wrote the previous update. Because of the greater volume of common shares traded as opposed to the limited liquidity of most preferreds, I find the commons to be a better indicator of a company's overall performance.

It appears that over the past three months, SB's share price movement has been trending in the right direction. On June 17, it traded at $1.09, and now it's priced at $1.40. That's an increase of $0.31. Encouraging, but considering the state of the drybulk shipping sector, it still faces stiff headwinds.

Now let's see how GSL's commons have performed over the past quarter since I wrote the previous update.

It appears that over the past three months, the share price movement has been trending in the right direction, in tandem with SB. On June 17, GSL traded at $1.33, and now it's priced at $1.73. That's an increase of $0.40. Encouraging, but considering the state of the container shipping sector, it still faces stiff headwinds.

Now let's compare SB's share performance over the past three months in relation to a number of its peers:

I'm happy to announce that SB's share price performance over the past three months was at the very top of its peer group. The above chart includes the following drybulk shipping peers of SB: DryShips (NASDAQ:DRYS), Navios Maritime Holdings (NYSE:NM), Scorpio Bulkers (NYSE:SALT), Star Bulk Carriers Corp. (NASDAQ:SBLK), and Eagle Bulk Shipping (NASDAQ:EGLE).

Now let's compare GSL's share performance over the past three months to that of a number of its peers:

The above chart appears to duplicate the share price performance of SB in that GSL's performance has also been at the very top of its container shipping peers: Seaspan Corp. (NYSE:SSW), Diana Containerships (NASDAQ:DCIX), Danaos Corporation (NYSE:DAC), Navios Maritime Partners (NYSE:NMM), and Costamare (NYSE:CMRE).

Before we discuss SB's future prospects, let's see how its preferreds have fared during the past three months. The following charts are provided by MarketWatch:

Ah, my old friend the "fail to redeem" clause has popped up again, guaranteed to cause controversy with some of my followers. It appears that the B Series carries that clause, which explains the price discrepancy between it and the C and D Series. Notice, the price of the B remains substantially higher; yet from June, at the beginning of this three-month review, its price has actually declined slightly, while the prices of the C and D Series have appreciated substantially. I believe this supports my position that in spite of the fact that the "fail to redeem" clause appears to make the B Series more valuable, it really doesn't and remains, in my opinion, a very bad buy in relation to the C and D Series, which I admit is contrary to popular opinion as demonstrated by the same price discrepancy.

This is excerpted from my latest TNP update, which explains a portion of my argument. I invite you to read the entire article.

I countered with what's considered a contrarian view, one which I still hold today. Should the B be called in a timely fashion, I contend that my D shares would be considered more valuable because TNP displayed the fiscal strength to be able to redeem the shares as required. And should it redeem the C Series in a timely fashion, I expect my D's would benefit even more. I'm aware that Tsakos might have to issue additional commons and/or preferreds to pay for this call, which might or might not prove advantageous were this to occur. Time will tell. What I am certain of, is that if the shares are redeemed in a timely fashion, I will continue to receive dividend payments at the effective higher yield I've had since the day I bought them, as displayed above.

Conversely, should TNP fail to redeem as required and incur the costly penalties, I believe all the preferreds - series B, C , and D - will suffer accordingly, but I will have been invested at approximately $2 less per share, or more succinctly, I would be at risk for $2 less per share.

Now let's see how GSL's preferred GSL-B has fared during the past three months:

In lock-step with the performance of its commons, GSL's preferred has increased in value during the past quarter.

Now for a little forward guidance

As a preferred investor, my one and only concern is about the long-term viability of each of these companies, which will not be determined by their latest quarterly financial reports. The real bottom line of their ultimate success or failure rests upon external factors beyond their control. When, and if, the BDI and container carrier shipping rates improve sufficiently, and how quickly this happens will determine whether or not these companies ultimately survive. Frankly, neither I nor any of the experts have the answer. Yet, rates are slowly improving, and hopefully this trend will continue and accelerate. That's the best I have to offer. The linked article concerning the Hanjin Shipping bankruptcy says it all. I suggest you read it closely and form your own opinion, which is at least as good as mine.

However, according to this three-month update, it appears that the investors in each company's commons and preferreds are betting these companies will survive and prosper. I'm hoping they are correct.

Disclosure: I am/we are long SB-D, GSL-B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more 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.