Putting it bluntly, the worldwide recession decimated the global shipping industry. Over capacity of vessels coupled with low economic growth drove day rates for the sector down to historic lows. That put a huge crimp on margins and many shipping stocks also sank. Since the end of the recession, the shippers haven’t fared much better as the sector remains one of the worst performers over the last few years.
However, that underperformance is attracting some well-known value-hounds.
With big investors now getting behind the shippers as well as improving economic conditions, the time could be finally at hand for investors to realize some of the value left in the sector.
“The Only Sector Left”
Since hitting a peak in 2008, stocks of global shipping companies have tumbled 60%. That huge fall is finally beginning to attract bottom fishers as the sector appears to have finally hit the sea-floor. This has included a variety of private equity king-pins.
Both Apollo Global Management (NYSE:APO) and Blackstone (NYSE:BX) bought several vessels over the last few years, while renowned billionaire value investor Wilbur Ross, was among an investor group who spent $900 million a year ago on 30 tankers hauling refined oil products. More recently, Ross became the largest shareholder in liquefied petroleum carrier Navigator Holdings. All in all, private equities total investment in the shipping space reached $3.3 billion last year- a 13-fold increase.
There’s plenty of reason for the private equity and institutional investor’s enthusiasm for the shippers.
First, seaborne trade is finally expanding. That’s helped push up the Baltic Dry Index- which measures earnings across four vessel classes- up more than 42% this year. Day rates for both Capesize and Panamax sized vessels have surged and are near critical breakeven marks. More importantly, analysts now estimate that booming trade will have the two vessel classes finally becoming profitable in the New Year.
SEE: Play The Bottom In Shipping
Then there’s second-hand sales to consider. Values of five-year ships plunged as much as 95% from their peak in 2008. However, according to the Baltic Exchange, the value of five-year-old Capesizes grew 5.7% to $31.4 million this year, while Panamaxes climbed 16%. Those rising second hand values are a sign that over-capacity in the sector is finally beginning to die down.
All in all, that’s a bullish situation for the beaten-down shippers.
Betting On Seaborne Trade
Given the potential for the shippers to outperform, investors may want to give the sector ago. The best way could be the broad Guggenheim Shipping ETF (NYSE:SEA). The fund tracks 26 different shipping stocks across the various tanker, dry-bulk and cargo sub-sectors. Top holdings include Knightsbridge Tankers Limited (NASDAQ:VLCCF) and Seaspan (NYSE:SSW). SEA is certainly cheap as the ETF can be had for just a P/E of 12.8. Expenses run 0.65%.
The biggest interest from private equity groups in the sector has to be the shippers of liquefied natural gas (LNG). Day rates for LNG tankers continue to rise and Golar LNG (NASDAQ:GLNG), along with its MLP subsidiary Golar LNG Partners LP (NASDAQ: GMLP) make an attractive pair in the sector. Both firms have attractive fleets and pay good dividends while investors wait for the LNG exports to really explode. Currently at 4.8% and 6%, respectively.
Finally, International Shipholding (NYSE:ISH) could be a good play. The shipper owns a wide fleet of 50 vessels- including container ships, auto carriers, tug boats and coal carriers. However, the real kicker for ISH is that several of its ships are Jones Act compliant. The 92-year-old law restricts shipping in U.S. waterways to American owned and flagged ships. That gives the firm a big edge as the U.S. economy continues to take off and export more goods.
The Bottom Line
Investors looking for values among the beaten down market may want to give the shippers a go. Several bullish catalysts are lining up in the sectors favor and currently firms such as Diana Shipping (NYSE:DSX) are trading well below their highs. That could lead to great long term outperformance as these factors play out.
Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.