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Monday, June 03, 2013

The Lonely Trade

As I was watching the Orioles extract some revenge last night I spent some time talking stocks and markets on the phone with some fellow value type investors. In the midst of the discussion we got around to the shipping stocks. I confess that I am over intrigued by these issues even though I have never really done well with them. It’s one of those industries that seems to defy conventional wisdom with a highly exaggerated boom bust cycle.  Right now it seem to me that we are at the bottom of the bust and as the over capacity finds its way into the scrap yards and global economic activity is at what is hopefully a trough I have been nibbling.

One of the catalysts for an interest in shipping has been the aggressive entry of Wilbur Ross into the sector. I have followed Ross into all sorts of forays over the years including steel, coal, mortgage insurance and mortgages and have always made money. It has also always been a long ride lasting five years or so with lots of ups, downs and twists along the way. Playing the equity vulture and snapping up troubled companies is not for the impatient or faint of heart and I suspect it will be the same with shipping.

Mr. Ross makes a compelling case for the shipping stocks. Container shipping still transports 90% of the worlds consumer goods and energy products so if the economy improves over the next decade so should the stocks. The glut of vessels ordered at the top of the cycle is being worked off as marginal players and vessels leave the industry. Demand and capacity should finally have a positive intersection in 2014 according to the Journal of Commerce. Rates have declined by something like 80% from the peak and may have finally found a bottom and could be headed back up. Although shipping rates rose slightly in the past year they are still well below the levels of a few years ago.

The stocks of the major shipping stocks have been beaten down to distressed levels. I have recently been buy shares of International Shipholding (ISH) at just 60% of tangible book value in spite of decent operating results and dividend yield of over 5%. I own shares of Tsakos Energy Navigation (TNP) and they trade at just 30% of tangible book value. The company has balanced exposure to both the crude and refined products segment. The company is entering the segment of the market with strong growth prospects, LNG transportation. It also pays a generous dividend of 4.7% at the current price.  I still have a stub of dry bulk shipper Paragon Shipping left from my earlier attempt at picking a shipping bottom that trades at 30% of tangible book value.

When I mentioned these names to my fellow value enthusiasts I was greeted with silence. Even the crickets took a break. No one had any interest. This got my curiosity up so I dug into SEC filings to see which value investor s had joined Mr. Ross and I in out shipping plunge. More crickets. Only Donald Smith and Company and quant firms like Renaissance and AQR were buying shipping stocks in the first quarter of the year. It seems that in addition to being a difficult business, shipping is a lonely investment as well.

Now I was really curious so I dug deeper to see who else in the world anywhere might be buying into the idea of a shipping bottom. Mitsubishi (MTU) has formed a private equity fund to buy into depressed shipping assets.  Blackstone (BX) and TPG have made private equity investments in the industry in recent months as well.  Several other smaller Private equity and distressed funds have recently ventured into he field as well.
I found one other noted investor who suggests that shipping stock may have found a bottom. Back in march our own Jim Cramer suggested that it was time to buy into dry bulk shippers as the Baltic Dry Rate Index had plunged to new lows. He suggested shares of Diana Shipping (DSX) which trades at 70% of tangible book value. The stock has done pretty well since then gaining about 25% or so but the stock is still cheap.  Mr. Cramer cited many of the same reason that Mr. Ross and I have such as a decline in capacity and a likely recovery in 2014.

So far shipping stock is a lonely trade.  This may be the first time in my entire career that I find Wilbur Ross, Jim Cramer, a few PE firms and myself standing alone in an industry. I like my team and will stay long the shippers and look for a chance to add more on market declines.

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