Do you want to hear a sad story? About five years ago I was looking around for oversold stocks and came across a shipping company named Star Bulk Carriers.
I figured the stock was severely depressed, probably wasn’t going to zero, and would likely recover over time. So I put the stock on my watch list. And that’s where it remains.
Over that time, Star Bulk’s shares went from about $6 a share to the current $24. Yup, I sat and watched a four-bagger and never pulled the trigger to buy the stock.
I love when my instincts are right but not when my execution is terrible. Oh well.
But the chance to own the right shipping stocks is not over because of pandemic-fuelled supply bottlenecks, and high shipping prices. Here are four ideas.
While normally floating along behind the scenes, marine shipping stocks have percolated up as a potentially stunning investment opportunity.
Disruption in global supply chains, shortages in containers, surges in worldwide trade and a global emphasis on infrastructure spending are all disrupting the market in ways that are playing into the hands of companies involved in marine shipping.
The shipping market at large is broken down across tankers, containers and dry bulk shippers of commodities such as grains, metals and coal.
With lacklustre energy markets, the action is in bulk dry shipping and containers.
The latter is linked to the demand for consumer goods which have surged, while dry bulk is linked to the global trade of commodities, which are cyclical to begin with, but bolstered by existing and planned infrastructure spending.
As far as dry bulk shipping stocks go, there are plenty of these, but most are small with market capitalizations below $1 billion – and many less than $500 million.
The container shipping industry, meanwhile, has few publicly traded options to choose from.
So, in addition to container shipping, investors might consider the opportunity presented by the containers themselves.
While trends in dry bulk shipping are driven by supply and demand, the opportunity in containers is driven largely by chaos at shipping ports caused by closures, delays and shortages.
Many experts feel rich container pricing will persist as ports continue to manage lengthy backlogs due in part to the pandemic, but also an increase in vessel capacity.
Textainer Group Holdings
- Industry: Rental and leasing services
- Market value: $1.6 billion
- Dividend yield: N/A
Textainer Group Holdings (TGH, $33.22) owns, manages, leases and sells its fleet of 4.1 million containers, and is well-positioned to benefit from current container market dynamics.
Textainer’s top-line growth is solid, with second-quarter lease rental income of $187 million – up handsomely from the year-ago tally of $145 million, and notably higher than the first-quarter’s $169 million.
But revenue growth would be expected in this environment, and a more skeptical investor might wonder why it’s not higher. The action, it turns out, shows up on the bottom line.
For instance, adjusted net income per share for the second quarter was up 428% from a year ago. Sequentially, earnings per share (EPS) were up almost 28%.
A couple of key metrics make this performance possible. First, better pricing for containers has driven down the impact of expenses.
Textainer has made investments to capitalize on growing demand for containers, with orders totalling $1.1 billion.
The company also claims “virtually all” containers are either on, or committed to, long-term leases.
Star Bulk Carriers
- Industry: Marine shipping
- Market value: $2.4 billion
- Dividend yield: 4.2%
The primary driver of growth for Star Bulk Carriers (SBLK, $23.07) is rising shipping costs. While these are bad for companies that make goods, they are manna for companies that ship them.
Given the surge in the Baltic Exchange Dry Index, which measures the cost to ship commodities across various routes, Star Bulk can potentially earn $41,000 a day, versus about $15,000 a year ago.
Among the many dry bulk shipping stocks, Star Bulk, with 128 vessels, is one of the largest, best capitalized and most profitable with a high dividend payout to boot.
Shipping rates have played well for Star Bulk. For the second quarter, revenues were about $311 million, up from $146 million a year ago.
Moreover, the company swung from a GAAP (generally accepted accounting principles) loss of 46 cents per share in Q2 2020 to a gain of $1.22 per share one year later.
Clearly, the company is feeling its oats with a dividend increase to 70 cents per share, a significant jump from the first-quarter dividend payment of 30 cents per share.
However, investors should note that Star Bulk is an inconsistent dividend payer and ceased paying a dividend for most of 2020.
But in another sign of confidence, management announced the authorization of a $50 million share buyback program with the second-quarter report.
- Industry: Marine shipping
- Market value: $1.7 billion
- Dividend yield: 2.4%
While Star Bulk provides entrée to dry bulk shipping stocks, Danaos (DAC, $83.52) offers access to container shipping where growth in rates is equally frothy.
To see the froth, investors need to look no further than the Freightos Baltic Global Container Index, or FBX, which measures the average price to ship 40-foot containers along various routes.
Over the past year, the rate has risen from $1,950 to the current rate of about $10,000.
DAC’s bottom-line for six months ended June 30, seems to reflect some of the froth, coming in at $6.17 per share on an adjusted basis – double the $3.06 per share from the year-ago period.
Adjustments aside, Danaos is throwing off a lot of cash now, with free cash flow (FCF) – the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business – of $109 million for the six months ended June 30.
This is an increase of three times FCF from the first six months of last year.
Despite a tremendous run-up in shares from $22 to their current perch near $85, the company still trades at a discount to its net asset value of $144 per share.
Breakwave Dry Bulk Shipping ETF
- Assets under management: $87.2 million
- Expenses: 3.3%
John Kartsonas, founder and managing partner at Breakwave Advisors – which is the advisor for the Breakwave Dry Bulk Shipping ETF (BDRY, $30.00) – aptly notes that that while demand for dry bulk shipping can change rapidly, the supply of ships is less flexible, with lead times of up to two years.
With dry bulk shipping tonnage growing and fleets remaining relatively stable, the Baltic Exchange Dry Index has grown from $1,500 at this time last year to the current rate of about $41,000.
The Breakwave Dry Bulk Shipping Index aims to capitalize on these trends, with a portfolio of near-dated freight futures contracts on dry bulk indices.
This fund has been on fire, with a year-to-date change in the net asset value at an eye popping 229% through the end of July.
While this performance is compelling and the underlying market dynamics look like they will continue, investors should be cautious and somewhat agile with respect to BDRY.
Despite a stellar return so far this year, the total return since its March 2018 inception is about 4.3%.
The fund’s expense ratio, at 3.3%, is bulk-sized, too.
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