A CNBC this morning mentioned that the ultra-wealthy are upping their contribution of private equity funds. Members of the Tiger 21 group now have about 22% of their portfolios in private equity (PE) funds. It makes sense: Having almost doubled the market's rate of return over the past 10 years, private equity continues to be one of the top performing asset classes. The smart patient money has consistently done better than the stock market for decades now as patience and price provide above-average payoffs.
I have long been an advocate of adopting the private equity mind set by paying attention to the price paid for a company or asset relative to its valuation and then exercise the patience for things to improve. The average investor holds shares for well less than a year while the average PE investor holds shares for more than five years. The longer holding period explains much of the outperformance. PE investors cannot trade on emotion or news flow, as they can't unload positions in milliseconds. This tends to make them more focused on what they pay for a company and they enter a position knowing that they will hold it for years.
I have found over the years that following private equity investors into sectors of the economy and even regions of the world can pay off big if I am willing to adopt their same value-conscious, patient time frame. One sector that has been attracting heavy attention from private equity for some time now is shipping, where the stocks are trading at bargain levels.
The Baltic Dry Index is trading near 18-month lows because the global recovery is still not strong enough to support sustained higher rates. Older vessels have not been scrapped quite as quickly as many had hoped over the past years and there is still some over-capacity in the industry. This has kept a cap on rates and could hamper profits for the second quarter. A bunch of shipping names are reporting earnings in the next week and the chances of earnings disappointments and stock price declines would seem to be pretty good.
Diana Shipping (DSX) has seen its stock decline steadily the past few months as investors soured somewhat on the shipping business. They report earnings tomorrow and analysts are expecting them to lose $.08 a share on revenues of $43 million. That is actually a little worse than last year's loss of $.06 a share for the Grecian dry bulk shipper .If the loss is much higher than that the shares could fall further. Right now the stock trades at 65% of book value so a decline for here could create an ultra-cheap bargain issue for investors with a private equity mindset.
Baltic Trading (BALT) could give investors a second chance this week. The company is scheduled to report earnings on Wednesday. I do not see any analyst expectations on the stock, so we will just have to hope for numbers worse than last year's that will spur some selling. The stock is selling at 78% of book value and an earnings-related plunge that took the stock back below 70% would be a great entry point for aggressive, patient investors.
Navios Maritime Holdings (NM) isn't set to report earnings until Aug. 21, but its stock has also been declining this year as the industry results have been lower than many had hoped to see. Analysts are expecting Navios to lose $0.13 a share on revenues of $135.2 million. That is a little better than last year's results of $0.16 per share loss on sales of $125.75 million. If the company falls short because of overcapacity and low rates, we could see the stock decline further. Right now, the stock is trading at 75% of book value, so a decline would create a meaningful bargain in this company.
The ultra-wealthy like private equity because it provides high returns over time. While we may not be able to get in on the action, we can use the mindset of private equity fund managers to dramatically increase our long-term returns. It looks like the shipping industry may be giving us a chance to practice smart patient investing by buying up companies at very low prices with the expectation of selling them at very high prices in five years or so.