Ride Scorpio Tankers Higher Via Scorpio Bulkers

Summary

• History doesn't repeat itself, but it does often rhyme. We're presented with a repeat of a super profitable arbitrage opportunity.
• In May 2019, we identified a major discrepancy in Scorpio Bulkers' pricing vs. its underlying holdings in surging Scorpio Tankers.
• Investors generated over 30% returns in 4 months via SALT while also benefiting from a higher margin of safety. STNG returned only 4%.
• The same situation returns today, only even more extreme. SALT now trades at less than 50% of the value of its fleet and holdings of STNG.
• This idea was discussed in more depth with members of my private investing community, Value Investor's Edge. Get started today »

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History Repeats Itself: Buy SALT to Ride STNG

I published nearly the exact same long thesis on Scorpio Bulkers (SALT) in May 2019 in what would go on to be a remarkably profitable run for the company during mid-2019, marking one of my strongest annualized returns even as underlying Scorpio Tankers (STNG) was a laggard throughout midyear.

I highly recommend a review of that report so readers can see the similar setup we had last year. Also keep in mind that Scorpio Tankers, the underlying 'hidden gem' is even more undervalued this time around and is also generating over triple the cash flows this year. I actually think this trade is much better than last year's setup, and we made 30% in 4 months last time.

Essentially, we realized that unloved SALT had a major holding in a popular tanker firm, STNG, yet SALT's valuations didn't account for any of this. I published our findings last May and we generated 40% in 2 months and widely outperformed STNG throughout the year (33% vs. 4% in 4 months):

Source: Yahoo Finance, STNG vs. SALT Performance

History is rhyming here. This time, I believe the setup is even better yet. The smart play is to buy Scorpio Bulkers instead of Scorpio Tankers. More advanced traders could consider a pair trade, but I prefer the singular long since I am also very bullish on STNG and it could be more volatile.

Scorpio Bulkers Overview

Image Credit: Scorpio Bulkers, 2019 Presentation

Scorpio Bulkers is a modern dry bulk pure-play, with 51 controlled vessels (including 22 leaseback financed ships). SALT has the most modern fleet on the market, and although current dry bulk

Analyst’s Disclosure:I am/we are long STNG. 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.