• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Transportation

Shipper DHT Should 'Just Say No' to Frontline Deal

The takeover offer undervalues DHT and management should hold out for a better deal.
By JIM COLLINS
Jan 30, 2017 | 02:00 PM EST
Stocks quotes in this article: DHT, FRO, NM

I wrote a bullish piece on DHT Holdings (DHT) for Real Money on Jan. 18 -- the stock closed that day at $4.23. This morning, DHT announced that it had been the subject of a takeover offer from Frontline  (FRO) . DHT shares are currently trading at $4.74. That's a nice little trade, huh?

While I'm not going to scoff at a 12% pop in two weeks, this deal is not a great one for DHT shareholders for a number of different reasons. I can't even count the number of columns I've written on shipping for Real Money in the past 12 months, many focusing on my Real Money "Best Idea" -- preferred shares of shipper Navios Holdings (NM) .

In doing all that research, however, the one thing I've learned about shipping stocks is that they are subject to massive undervaluation at certain points in the shipping cycle. Not to be Captain Obvious, but that's when you should buy. If you had done so exactly one year ago today -- when commodities were being jettisoned, along with the stocks of the companies whose ships carry those commodities -- you would have made a bundle, and my firm did so.

Pats on the back aside, if I have described when to buy shipping stocks, I surely can't leave you hanging without an answer to the question, "when does one sell?"

I have to give a Justice Potter Stewart-like answer to that one. I can't really define "peak shipping," but I know what it is when I see it. I am not seeing it now. Not even close. Thus, I don't think this is a good time for DHT management to sell out to Frontline -- and there are a number of specific reasons why this deal is suboptimal.

  1. It's an all-stock deal, specifically 0.725 shares of FRO for each share of DHT.
  2. Frontline's shares have been terrible performers, and shipping magnate John Fredriksen's large ownership position in FRO gives me pause as a small investor.
  3. While extreme seasonality and basis differences make it difficult to delineate the tanker cycle in the short term, it is quite clear that we are nowhere near the top of the cycle. In a recent business update (DHT is scheduled to report fourth-quarter results tomorrow), DHT management noted that 4Q spot earnings for its VLCC fleet were $34,300/day versus the $58,600 average for 4Q 2015 -- hardly a sign of cyclical strength.
  4. The inherent cyclical risk in shipping stocks means that to buy them one must seek asymmetric returns. Put another way, I don't buy shipping stocks for 12% returns. I'm looking for at least 10x that amount -- and hoping I possess enough wisdom to sell at the right time.

So, this is not the right time to sell. With DHT shares having closed 2015 at above $8 a share, it's hard to explain why DHT management would want to sell out at $5.09 (the implied value of the FRO offer as of Friday's close) a mere 13 months later.

To their credit, DHT management announced this morning the implementation of a "poison pill" plan that would allow them to issue preferred shares in the case of an outsider accumulation. Obviously, this doesn't apply to the 16.4% stake in DHT that FRO announced this morning, but it will keep FRO from accumulating an even larger stake through open-market transactions.

It is my fervent hope that DHT management holds out for a better deal. In this case, that may mean no deal at all. As Billy Beane said in Moneyball "Sometimes, the best trades are the ones you don't make."

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Collins was long DHT, NM, NM-G , NM-H and NAP, although positions may change at any time.

TAGS: Investing | Global Equity | Transportation | Markets | Stocks

More from Transportation

United Parcel Service Is Testing Key Support

Bruce Kamich
Jan 15, 2021 2:30 PM EST

A look at the charts of UPS.

Food for Thought for How to Play SpartanNash Stock and Options

Paul Price
Jan 13, 2021 7:00 AM EST

The food distributor's shares appear undervalued and that presents investors with opportunity to profit by buying its shares or initiating option positions.

Uber Technologies Could Help Drive Investors' Returns Higher

Bruce Kamich
Jan 12, 2021 2:35 PM EST

The charts and indicators remain bullish and pointed up.

Trade Carefully as Plug Power Is Still Extended

Bruce Kamich
Jan 7, 2021 10:07 AM EST

PLUG is likely to finish the day with an upside price gap.

Chart Damage: We Have Lowered Our Market Outlook

Guy Ortmann
Jan 5, 2021 10:42 AM EST

The Dow Transports have frequently worked as a leading index.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 09:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    When it's time to sell, will you act or freeze?
  • 08:35 AM EST GARY BERMAN

    Wednesday Morning Fibocall for 1/13/2021

    Lower highs... SPX (Long-Term View) The 1/8/2...
  • 08:07 AM EST GARY BERMAN

    Tuesday Morning Fibocall for 1/12/2021

    Watch if the recent trend of lower highs continues...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login