Is bull theory on shipping stock rebirth just wishful thinking?
When times are tough for ocean shipping, and stock prices wallow in the gutter, the bulls inevitably emerge to insist that now is the time to invest. They’re doing so again today.
There have been quite a few different bull pitches over the past decade, all of which boil down to ‘buy low, sell high,’ the same precept private Greek owners have used to amass their fortunes, or alternatively, lose them. As the saying goes, ‘How do you make a small fortune in shipping? Start with a large one.’
The pitch in the immediate aftermath of the 2008-09 crisis was that falling rates were due to a glitch in the plumbing of the global financial system, not the world’s economy, thus trade and shipping would bounce back sharply in the so-called ‘V pattern.’
A few years later, the argument was that vessel asset values were extremely low versus the 10-year trailing average, and must inevitably revert to the mean, as if by gravity, pulling stock prices back up with them.
Then came the idea that ‘eco ships’ built with greater fuel efficiency would lead to much higher returns for those that ordered them.
And when markets became particularly abysmal, as they did in dry bulk, the pitch was that the market was ‘so bad it’s good.’ Rates couldn’t possibly go lower because they were basically at zero, so they must go up.
Bull argument circa 2019
Today, the prevailing bull thesis is that rates are well off their lows and have risen significantly year-to-date, with the 2020 fuel sulfur cap rules poised to hoist them higher still, while stock prices remain stubbornly disconnected from much-improved fundamentals – a disconnect that must inevitably end.
This perspective is exemplified by the views of Joakim Hannisdahl, head of research at Oslo-based Cleaves Securities, and Petter Haugen, equity research analyst at Paris-headquartered Kepler Cheuvreux.
“The tide has turned. Market sentiment could not ignore the strong fundamentals forever. We see significant upside in all shipping segments,” asserted Hannisdahl in his just-released quarterly outlook.
Hannisdahl is most bullish on listed tanker owners. “The segment is our top pick, with an expected 143 percent surge in our oil tanker share index by the third quarter of 2020,” he wrote. The company’s index is comprised of 10 U.S.- and Oslo-listed companies including DHT (NYSE: DHT), Euronav (NYSE: EURN), Frontline (NYSE: FRO), International Seaways (NYSE: INSW) and Nordic American Tankers (NYSE: NAT).
In dry bulk, Hannisdahl predicts “one of the longest cyclical expansions since the 1740s.” The analyst anticipates that Cleaves’ dry bulk share index, which covers nine listed companies – including Scorpio Bulkers (NYSE: SALT), Star Bulk (NASDAQ: SBLK) , Safe Bulkers (NYSE: SB), Genco (NYSE: GNK) and Eagle Bulk (NASDAQ: EGLE) – will jump 47 percent over the next year.
Hannisdahl’s bullishness extends to gas shipping as well. In the liquefied petroleum gas sector, he predicts Cleaves’ three covered stocks will surge 80 percent over the next year, while in the liquefied natural gas shipping sector, he believes Cleaves’ three covered stocks will rise 40 percent over the next year.
Haugen of Kepler Cheuvreax argued his bull thesis at the Marine Money Week conference in New York held on June 17-19. He said that “the case is building for a prolonged super-cycle” and predicted that “2020 will be the first year since 2007 when all commodity shipping segments will be at a cyclical high at the same time.”
He highlighted what he believes is a positive effect of higher oil prices, due to both OPEC production cuts and the looming sulfur cap on shipping bunker fuel. He projected that higher bunker prices will slow down vessel speed to reduce consumption, which will reduce effective supply, a tailwind for rates.
He also noted that higher commodity pricing creates more “headroom” for shippers to pay more for transport, whether for crude oil, refined products, liquefied petroleum gas or liquefied natural gas. “Higher oil price increases the willingness to pay for transportation services,” he said.
Regarding OPEC cuts, he maintained that reduced exports from the Middle East to Asia will be supplanted by exports from the U.S., which travel longer distances and soak up more ships. “OPEC cuts are simply subsidizing U.S. shale and moving incremental production two to three times further apart from consumption,” he said, speculating that all of these factors combined might lead to a ‘super cycle’ situation for shipping and its equities in 2020.
The bear rebuttal
The counterargument to the idea that listed shipping stocks must eventually rise if the fundamentals improve goes to the philosophical question of ‘If a tree falls in the woods and no one is around to hear it, does it make a sound?’
Stock picking was famously compared to a beauty contest by economist John Maynard Keynes in 1936. Keynes theorized that it is not about which is the ‘prettiest’ stock, but rather, which stock investors believe other investors believe is the prettiest.
The bears’ argument on shipping stocks, particularly the smaller market-cap dry bulk stocks, is that most of today’s trading is not done by individual fund managers, but conducted passively, in connection with exchange traded funds, or by computer algorithms. Shipping equities are now almost completely off the radar of these primary trading volume drivers, which explains why shipping stocks have not been moving as they should be based upon improvements in fundamentals.
In light of the ‘beauty contest’ concept, potential investors who believe shipping stocks will remain off the radar of the primary volume movers would theoretically be reluctant to pick those stocks, and would instead opt for higher-volume equities in other sectors such as tech and health care, creating a ‘chicken or the egg’ dilemma for shipping stock momentum.
At least two other arguments are cited by bears. First, shipping equity investors in the hedge fund community have been so badly burned by losses over the past decade that they’re not interested in jumping back in.
Second, two major U.S. investment banks – Morgan Stanley and J.P. Morgan – have dropped their shipping analyst coverage in the past month and a half. If banks of this pedigree don’t care enough about shipping equities to pay a single analyst’s salary, what does that say about the stocks?
Source: Freight Waves