Inflation + Stimulus = Buy Shipping

Summary

• I've been reminding investors about the value proposition and recovery potential in shipping over the past few months, but now we have even bigger tailwinds.
• With new policy likely to favor increasing stimulus and eventual infrastructure spending, we're likely to also see inflationary pressures.
• No sector benefits more from this combination than shipping. Asset values rise, demand for imports will rise, and real values of existing debts will drop.
• 2021 is poised to be one of the best shipping years on record.
• In this update, I share two of my favorite ideas in the sector for public readers. The full 2021 Model Portfolio is available at VIE. Free trials open + $500 off for new members.

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Inflation + Stimulus = BUY Shipping

As covered in the summary bullets, I believe now is the most attractive time since early-2019 to invest in the shipping sector. We have the dual tailwinds of likely stimulus (i.e. boosting the already gangbusters containership trade) and inflationary pressures (i.e. driving up asset values). 

No sector benefits more from this combination than shipping! Furthermore, we are finally starting to see the end of the tunnel on COVID-19. It will be a tough next few months, but the exit is becoming more and more clear. This will serve to bring positive sentiment back to these stocks, an effect we've started to already witness since November.

2021 Looks Like 2019?

A couple weeks ago, I noted that 2021 looked a lot like 2019 in terms of the setup for shipping investments. As a reminder, during 2019, we returned 100.5% and 42.6% in our two model portfolios, beating the market by an average of 47%! This performance is shown below:

2020 was a challenging year, but we still outperformed out industry comps by around 30%. Thus far, 2021 is starting out as advertised. In just 1 week, our model portfolios have already returned 12.2% and 16.5%, outperforming the market by nearly 8%.

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Two of My Favorite Ideas

Our model portfolios include a total of 12 top selections, plus we also have top income picks and quarterly preferred equity coverage. In this free public update, I will include two of my top picks for 2021: one which is a fairly clear name I've covered before and one which is a riskier undiscovered small cap.

To review our full selection for 2021, sign up for a free trial here. 

• Risk/Reward: (CMRE) - $8.44 - Containerships + Income

Costamare has been a long-term favorite, but the valuations were too rich for much of the past couple years and I preferred different containership companies, which we had runaway success with during 2020. This balance has changed in the past few months as CMRE has been a major laggard despite benefitting significantly from improved markets. I expect Costamare will post record profits in 2021 and I believe we'll also see a near-term dividend increase as new growth and higher rate charters come online. I've communicated with CFO Greg Zikos dating for over eight years and have high confidence that the management team to continue to deliver steady results. We interviewed Zikos in November and a public link to the discussion is now available. Our Associate analyst Climent Molins has also posted a recent full-length review. My current 'fair value estimate' is $10.00, but I expect we could easily outpace that if we see a dividend increase and overall market strength into 2021.

• Speculative: Stealth Gas (GASS) - $2.69 - Small LPG Carriers

Stealth Gas has one of the world's largest small-scale LPG fleets and also owns a handful of medium-sized ("MGC") vessels. The discount to NAV here is extreme (74% discount!), but the stock itself is quite illiquid and management is in no particular hurry to boost share prices. The CEO has been a vocal supporter of share repurchases, but he has been limited by a combination of a more conservative Board of Directors and a very thin share float. GASS attempted a $10M tender offer last April but they set the share price too low and were unable to scoop up significant shares.

With BW Group rapidly expanding their LPG investments, including merging GASS' primary peer, Epic Gas, with Lauritzen Kosen last month and buying a huge stake in Navigator Holdings, industry changes are clearly afoot. The GASS fleet is worth nearly $9/sh and at least part of this fleet could represent an obvious takeover candidate. None of this will happen without management's approval and GASS is clearly subpar in the governance realm; however, they have generally been good actors over the past 5 years with the biggest critique that they have been slow to act and poor at marketing. If small scale rates improve post-COVID, GASS will be a cash flow machine. It might take awhile for this one to start moving, but when it does, we could easily be talking 3x or higher. My current 'fair value estimate' is $5.00/sh (86% implied upside).

The Rest of Our Top Picks?

All of our top picks and model portfolios for 2021 are available on Value Investor's Edge.

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