Seeking Alpha

J Mintzmyer Positions For 2020: Shipping Is Looking Strong

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About: Dorian LPG Ltd. (LPG), EURN
by: J Mintzmyer
J Mintzmyer
Global Shipping & Trade, Income Opportunities, Deep Value, short ideas
Summary

For investors looking at deep value opportunities, consider maritime shipping names.

A big story for the maritime shipping sector will be IMO 2020, the significant regulatory shift that impacts the pricing and availability of bunker fuel for vessels.

A big headwind? The run-up to the 2020 presidential election.

With markets remaining at significant highs, and investors looking for stocks or a sector that the markets have discarded, maybe the area they should look at is maritime shipping.

J Mintzmyer is well known for his coverage of the global shipping business. He started Value Investor's Edge, a Marketplace service focused on deep value research, in May 2015. Below, this Seeking Alpha contributing veteran shares his observations of what 2020 may bring for investors, especially those eyeing shipping.

What do you expect to be the key driver of stock market performance over the course of 2020?

I expect a mixture of economic data, the Federal Reserve's policies, and leading political candidates and the specific evolution of some of their leading policy proposals will have outsized impacts on overall 2020 stock market performance. That's not a very bold statement. I anticipate (or at least hope for) a mostly status quo-type broad market with the caveat that I think proposals from leading candidates will weigh heavier than usual.

If you focus on a specific asset class or sector, please address that - what will be the key driver?

I focus on deep value opportunities and market dislocations, which has led me to a heavy positioning in many maritime shipping names. Our research platform, Value Investor's Edge, focuses heavily on this segment. In shipping, the main driver as we enter 2020 is the biggest regulatory shift in modern history, "IMO 2020," which dramatically shifts the pricing and availability of bunker fuel for vessels. The more chaos we see from this implementation and the higher overall costs of fuel, the better for our shipping plays.

At first, this runs counterintuitive as we're cheering for surging fuel costs, but this is because most of our investments are in the firms with modern "eco" tonnage or with scrubbers equipped (which allows them to keep burning the way cheaper old fuel). If fuel costs surge, we'll also see ships slow down to become more efficient, which effectively reduces available supply, driving up the non-fuel portion of the rates even further. IMO 2020 implementation and global ton-mile demand shifts are our top drivers.

As we begin 2020, are you bullish or bearish on U.S. stocks/your preferred asset class?

I try not to outguess the global market valuations, I'm not smart enough for that. However, Barron's did publish a report in late October from their "Big Money Poll" showing that bears are at a two-decade high heading into 2020. That was the most bullish report I've seen in years as major crashes almost never happen when a lot of people expect it to happen already.

In terms of shipping stocks, I'm very optimistic across many of the subsectors. However, we produced all-time record returns in 2019 (our two model portfolios averaged +71.5% in 2019 vs. the Russell 2000 up 24%), so I don't expect to repeat that level of blowout. It's possible I might never beat the market by that much (47%+) again in my lifetime. That'd be okay.

Which domestic/global issue is most likely to adversely affect U.S. markets in the coming year?

I'm the most concerned about the 2020 Presidential elections. It's not so much a matter of "getting political" and picking Republicans vs. Democrats, but we're still in Primary Season and some of the policy ideas have not been thought out very well.

I expect we'll see a much more moderate shift by mid-year, but there are a few policy proposals out there which have the risk of extremely crippling our economy and setting us back by decades. I respect a lot of these folks and I believe their policies are well-intentioned, but some ideas are scary when heavy economic analysis is applied and historic case studies are examined.

How does the political climate affect the risks and opportunities for next year?

As mentioned above, the political climate is likely to be a major factor in the US markets. I believe this is creating an investment opportunity in many areas of energy and related infrastructure. Not all fossil fuels are created equal, and while the long-term future of oil is getting more tenuous, global natural gas consumption is likely to grow immensely for 20-30-plus years. There's opportunity there and it is not incompatible with a "green" view either.

What do you expect out of the yield curve in 2020, and what impact will that have on the equity market and the economy in general?

I'm wildly out of my lane on this one and don't consider myself an expert here. My unqualified viewpoint is that we're living in a global reality of ZIRP and NIRP (zero or negative interest rate policies) and the Federal Reserve has shown they are extremely accommodating to markets. I don't expect that to change, if anything rates could move lower yet.

In terms of asset allocation, how are you positioned as we begin the New Year?

Since my primary investment sector is maritime shipping and related infrastructure, I'm taking a lot of risk in my portfolios. I'm a deep value investor, which now brings me to recent energy investment positions. The risks are significant, so I balance this out by holding a hefty portion of my net wealth (more than 50%) in cash and equivalents.

Although I made the note about the 2020 Big Money Poll being incredibly bullish (because everyone is so bearish already), I'm skeptical on certain broad market valuations myself and would hate to be fully invested. If I want more broad market exposure, I'd skip the indexes and buy selective blue chips here because the S&P 500 is massively skewed by just 5-10 high fliers.

What "surprise" do you see in the market that isn’t currently getting sufficient investor attention?

I'm not clever enough to have identified a must-happen black swan event in the broad market that nobody has found yet. I focus on my lane of maritime shipping. I believe in that particular niche that the market hasn't properly appreciated the bullish setup we're seeing nor the enormous cash flow generation capabilities of some of these companies. I expect that Q4-19 earnings in late-January through February, combined with lots of strong guidance and new dividends, will start to really wake people up.

A lot of people look at tankers now and naturally think "oh, they've already run" because a lot of the names have moved up 50% or more in 2019. I had a lot of people tell me the same thing about Dorian (LPG) last June, when I was pounding the table at $8 and folks complained it "already ran" from $5. Dorian trades in the $15s now and it still isn't really expensive considering underlying asset values and cash flows.

There are many names in similar situations, such as Euronav (EURN), which is one of our top picks for 2020 (along with 11 other names) at Value Investor's Edge). EURN is a name that "already ran" from $8 to $13, but if these sorts of rates persist, EURN could generate more than $5 in free cash flow in a single year, pay dividends of up to $1/quarter, and easily trade into the $20s or higher. There are lots of risks if rates fail to persist of course, but the upside leverage on many of these names is extraordinary.

Disclosure: I am/we are long EURN, LPG. 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.