Smart Money Investing in Shipping

 | Nov 05, 2013 | 2:30 PM EST
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I have been a bull on the shipping stocks pretty much all of the last year. I have noted that most analysts expect a turnaround in 2014 as more ships have been scrapped and fewer new vessels ordered.

Slowly, but surely we are seeing the excess capacity in the industry decline. The Baltic Dry Index, still well below the high levels of the last five years, has shown some improvement this year but in a volatile fashion. Tanker rates have been showing a steady increase this year as well as global demand is picking up from the low levels of the past few years.

It is not going to be a rapid recovery and will most likely take a few years to play out fully, but these stocks started moving from a rather low level.

The industry has been so battered that a lot of private equity and distressed money has found its way into the shipping sector. The investors hope to take advantage of the astronomical returns that will be earned if shipping recovers in full over the next decade. Firms like WL Ross, Apollo, Oaktree, Kohlberg Kravis and Blackstone have all entered into sizable shipping deals in the past year. It is patient money, but they are looking for returns from this industry measured in multiples not percentages.

Some of these stocks have made huge moves already this year. My two favorites coming into the year were International Shipholding (ISH) and Tsakos Energy (TNP). They are up 66 and 43% respectively. Our own Jim Cramer was bullish on Diana Shipping (DSX) earlier this year, and that stock is up 62% so far in 2013. Shipping quickly went from a lonely trade to a rather popular one as money came looking for a cheap home on the heels of high-profile fund buying.

You can still put some money to work in the sector but a degree of caution and common sense is required. We want to look for the cheapest stocks that are showing signs of fundamental improvement, or have some catalyst to move the stock higher. Initially, we can use price-to-book value and F-scores to find some stocks that are cheap and will benefit from a shipping recovery. The biggest caveat with shipping stocks is that this is a long-term sector. If you are not investing with at least a five-year time frame, you might want to go back to trading Apple (AAPL) and leave the shipping stocks alone.

Stealth Gas (GASS) is a good example of a stock that can still be bought at current levels. The stock is up off the lows it hit after a bad earnings report but the stock is still at just 85% of book value and has an F-score of 7. They are the only publicly traded liquefied petroleum gas tanker company right now (that will change when Wilbur Ross completes the navigator group IPO) and that should be a growth sector for the shipping industry for several years.

International Shipholding may be up quite a bit this year, but the stock still trades for less than 80% of book value and has an F-score of 7. The company has several carriers that are flagged under the Jones Act and is benefitting from port-to-port shipping within the United States,

Star Bulk Carriers (SBLK) is another stock that is still trading cheap on a price to book basis. In fact it is one of the cheapest stocks trading at a little less than 40% of tangible book value. The F-score is not that strong but the catalyst here could be some serious smart money buying. They recently did a stock offering to buy new ships and working capital and the stock price took a hit after the deal was closed.

Howard Marks' distressed funds were a big buyer of the stock, however, and now own more than 20% of Star Bulk. The folks at Oaktree Capital have pretty sharp pencils, and one imagines they figure the company is worth a lot more than the current stock price. It is worth taking a position to invest in a shipping recovery beside one of the best distressed investors of all time.

Shipping stocks should provide huge returns over the next five years. The smart, aggressive, patient money is continuing to invest in the sector. Some of the stocks have bounced quite a bit this year but there are still some opportunities to buy assets very cheaply in the sector.

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