Shippers: The Most Bombed Out Sector Of The Market

Sir John Templeton used to quip that “People are always asking me where the outlook is good, but that’s the wrong question… The right question is: Where is the outlook the most miserable? Invest at the point of maximum pessimism.”

If you want deep value and a wide margin of safety then you have to be willing to venture where others won’t. Maximum pessimism is what creates the asymmetric bets where the risk then becomes time and not price, as Richard Chandler puts it.

Looking across global markets today there is perhaps only one industry that fits this bill. Where the outlook is beyond miserable and the stocks within it have either been dismissed by investors or just outright forgotten all-together.

I’m of course talking about marijuana stocks…

Just kidding. No. I’m talking about the shipping sector.

Take a look at the following charts showing the prolonged grinding drop in shipping rates.

The Harpex Shipping Index has been in a steep rolling bear market for nearly a decade and a half.

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The Baltic Dry Index is down to 645. It’s only been lower three other times in the past 35 years for which we have data. Once in 1985, then in 2015 and again in 2016.

(Click on image to enlarge)

Price action drives sentiment which in turn drives price action in a perpetual feedback loop. A decade plus of falling prices and negative investment returns has created a pretty fatalistic consensus towards the industry — which has, in turn, led to some pretty amazing prices…

Many shipping stocks now trade for less than half their liquidation value. And that’s using sale prices in the fairly active second-hand purchase market.

This means that companies could liquidate their fleets and after paying off debt there’d be enough leftover cash that equity holders would more than double their money.

So to sum things up, we have (1) maximum pessimism which has driven (2) bargain prices which creates (3) a large margin of safety.

That’s pretty good, but now we need a catalyst.

The shipping industry is a notoriously cyclical industry which follows the classic Capital Cycle. Martin Stopford’s excellent book, “Maritime Economics”, notes that there have been 23 shipping cycles going all the way back to 1743. Timing here is key. We don’t want to sit in a dead money trade for another 5-years when our capital could be going towards something that’s actually working for us.

Luckily, there’s a number of potential catalysts lining up that could make 2019 the year that the trend finally changes. These are:

  • A one-two regulatory punch
  • New banking regs leading to tighter financing and thus lower supply
  • Capital Cycle: supply and demand in deficit
  • China/India starting to buckle down on fighting pollution which means they need to import cleaner industrial fuel imports (ie, more shipping demand)
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Disclaimer: All statements are solely opinions and are for educational purposes only.

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