i Bergamot: Discovery at Sea

Tuesday, March 5, 2013

Discovery at Sea

        I got sidetracked over the weekend.
In an unusual chain of events I discovered the Shipping Industry. Shipping over oceans is a very peculiar business at this moment in time. Needs a different mind-set and time horizon, comparing to other industries I follow. I spent 3 days trying to learn everything i can about it, but information is very scarce - there is no investment letters and write-ups on Montley Fool etc are very general in nature and don't address many problems I see. There is some industry consulting and research, but it's not available for free, and fees are in thousands.

        First of all, out of 48 companies in Finviz shipping section, over half are Greek and Bermuda corporations. Not surprising to see Greek ones being decimated past their financial crisis, with many smaller ones already bankrupt or sold. I have been wondering for years - whats the big deal about Greece, what is there to gain for big boys? Now I know. Small greek shipping business owner is too juicy victim to pass up. Now its not that important anymore - damage has been done and over with.

       Prime industry publication is http://www.tradewindsnews.com/
As suspected, it is filled with endless pump for foreign traded securities and not much analysis. They do have a pretty good You Tube channel with interviews from past trade-shows, i reviewed it with stunning results. While past years sponsors where banks and insurers, most recent conference was sponsored by corporate law firm specializing in bankruptcies. Corporate lawyers are like military medics - when battle is over, they come out to tend to wounded and remove the corpses. Old vampire Wilbur Ross is there too, he feeds on corpses methinks... Greek shipowners are now largely absent, replaced with young american CEO's - a restructuring placeholders of decision makers. It's a good thing really, shareholders where bearing losses of this mess and industry is left for dead. Somebody has to put an E into P/E, and Greeks aint gona do it.

       For the rest of my analysis I removed smallest companies with market cap under 50mil, bringing whole industry to only 37 stocks. First thing that strikes me as odd is that more than half have Price-to-Book (P/B) ratio of less than 1, ten with P/B less than 0.5 and only four with over 3. I have never seen anything like it. Basically they are either a free gift to Wall Street or fully half of ocean shippers worldwide are bankrupt! They just didn't filed papers yet. Obviously, P/B is a deceptive measure, affected by depreciation, stock buy-backs and other accounting shenanigans. I usually completely disregard it, but seeing it as industry-wide dynamic makes money hair on the back of my neck go wo-wo-wo. My present position DRYS is the largest of sub-0.5 P/B stocks.

   Insider ownership is not really an actionable fundamental, but these days I rarely see management and owners with any skin in a game. Here is companies with nearly half of shares owned by insiders: GLNG, TK, SSW and CPLP at 30%. Most of major shippers pay nice dividends - with NMM and CPLP at over 12% and SFL, NAT, CMRE, TOO not far behind. At this time I will not focus on dividend accumulation, because I am not planning to hold them long enough. My view remains that this market is on its last leg, shippers will be hit hard (probably harder than most) in upcoming correction/bear market.

      Short interest (SI) is not homogeneous thruout this industry. KEX, TDW and NAT are at higher levels of Short Ratio (SR) than other majors, but only KEX is near 52 week high and in danger of short squeeze. Contrary to popular opinion, I don't view high SI and SR as bullish indicator. Short sellers are usually very smart and operate with superior knowledge. I don't find it wise to fight them in general, and specifically here I don't see anything way out of wack.

     If I buy any today, SSW looks good. Really good opportunity is sometime in future.
http://stockcharts.com/freecharts/candleglance.html?sea,TDW,CKH,SSW,MATX,STNG,DRYS,DSX,NAT|B|P5,3,3