Why I Absolutely Love One of the Most Despised Sectors Around

 | Feb 01, 2018 | 3:36 PM EST
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It's almost a point of pride among contrarians to note that the group in which they are invested is "the most hated" in the stock market. The genesis of my idea to buy my top-performing Real Money Best Idea -- the Series G Preferreds of Navios Maritime (NM-G) -- was a turn in sentiment on dry-bulk shipping stocks in early 2016 the likes I had not seen since the summer of 2008.

To state that dry-bulk stocks were hated by the market in January 2016 is an understatement, and in the case of Navios, the bond market was pricing its fixed-income securities (like NM-G) as if bankruptcy was an imminent possibility. Well, the markets were wrong and that was a huge win for my firm, Portfolio Guru, LLC, and my clients.

Fast forward two years and as we are entering the fifth quarter of the Trump Jump I have been looking for hated groups to try and find another NM-G for my clients. Exploration and production companies (E&Ps) are certainly in that bucket, and I was doing some work this week on names like Range Resources (RRC) and Southwestern Energy (SWN) that convinced me that natural gas E&Ps are actually more hated than oil E&Ps.

Sentiment on the price of natural gas can change in minutes, but the natgas E&P group is full of stocks hitting 52-week lows. While I certainly think that natgas E&P stocks are good long-term buys here, I am not seeing the pure, unadulterated hatred that I saw with Navios in January 2016.

So, to find an even more unloved group than natgas E&Ps, I went back to the well once again. Yes, there are shipping stocks that have been completely bombed out in the past few weeks, although this time it is a different subsector than dry bulk.

Oil tanker stocks have just been absolutely creamed in the past two weeks, and if you were busy watching Amazon (AMZN) and Facebook (FB) instead, you missed the carnage. Good thing, actually. The table below shows the two-week performance data for a select group of tanker shipping companies and don't read any further if you are squeamish.

What's causing the share price declines among the tanker shipping stocks? Well, these are commodity shippers, and shipping rates have dropped sharply.

According to Platts, a journey from the Persian Gulf for a Very Large Crude Carrier (VLCC) that was measured in November at an index value of 70 is now being priced at an index value below 40. The real pressure on the stocks has come, though, as those indicative VLCC rates jumped in January from an index value of 40 to 50 only to begin a decline mid-month back to the 40 level.

That's what has spooked the stock markets and killed the tanker shipping stocks. The normal seasonal pop in VLCC rates caused by increased winter fuel demand in the Northern Hemisphere just didn't happen this year, and any hope for a January catch-up was quashed by mid-month.

Demand statistics themselves are strong, and U.S. oil inventories are lower than they have been in years, but that doesn't necessarily translate to greater demand for a ship full of crude that is the length of five football fields.

The main culprit behind the recent fall in VLCC rates has been a surplus of ships waiting to load cargoes in the Persian Gulf. If you didn't believe that OPEC's cartel-wide production cuts were holding, the surfeit of VLCCs in the Gulf are evidence that they are. Chinese oil imports rose 10.1% in 2017, and while a dip in December added fuel to the dumpster fire that enveloped the tanker shipping industry, I believe we will see a similar increase in Chinese oil imports in 2018.

So, the possibility for geometric returns based on reversion to mean for VLCC rates is there. Next time I'll go through the individual names and identify which ones are most deserving of a near-term stock price bounce.

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