I am writing this column through tears. I was looking at a chart of Danaos (DAC) stock last night, and... ouch. DAC shares have risen more than 400% since August 1st. I have written many columns on the shipping space for RM for the last seven years, and I consider it a personal affront when I miss one. The largest player in container ships is privately-held Seaspan, but two of the other Top Five companies, Global Ship Lease (GSL) and Navios Maritime Containers (a sister company of Navios Maritime (NMM) , of which I have written) have also shown massive stock price gains since August. Costamare (CMRE) , the number two publicly traded player in container ships has "only'' posted a 60% share price gain since August, so I focused my efforts there.
In order to play cyclical stocks, you must understand where you are in the cycle. Cyclical investors know that cash flows can and do vary wildly as an industry moves through a cycle. The stock prices of the container shippers are telling you that they are sitting on a gold mine. They are.
The best indicator for pricing for containerized cargo transportation is the Shanghai Containerized Freight Index. The SCFI has gone absolutely bananas ths year, posting a gain of more than 100% to its current level of 2,411. The individual components of the SCFI have shown even more strength, with a particularly huge spike in prices for shipping containerized goods from China to Western Europe. Shipping containers themselves are, reportedly, in short supply, and the entire industry seems to have taken a long journey into Thunderdome.
Reading shipping industry tea leaves is not easy, but there is massive port congestion at global freight ports, which tends to increase rates (ships waiting to discharge are off the market, thereby reducing supply) and the volume of U.S. imports has gone nuts. The Port of Los Angeles' Signal tool (found here) is showing a 50% increase year-on-year in containerized volumes being handled at its ports. Anecdotal reports suggest a much more chaotic situation in Europe, not made easier by the decision of many Continental governments to ban travel (even commercial) with the UK after last week's discovery of a mutant Covid-19 virus strain there.
This is how shipping works, and this is when you own the stocks. There is a finite supply of container ships in the world and the economic depredations brought on by Covid-19 caused financial hardships at some players and a decline in the orderbook for new ships. But that's when shipping companies thrive. When their product (the ships themselves) is in a shortage position, rates will skyrocket. I saw it with the Dry Bulk names in 2006-2007, I have seen it multiple times with the oil shippers, and now, finally, it is time for the normally sleepy "box" shipping sector to shine.
It would be easy to blame all of this on Amazon (AMZN) , but before we bought everything online, we were buying it from physical stores such as Walmart (WMT) and Target (TGT) , and that stuff comes from China, in shipping containers, as well. Congestion at the ports themselves is causing part of this rise in shipping rates, along with onerous environmental rules that make marginal owners want to leave the game to avoid the expenses of fitting sulfur reducing filters ("scrubbers") to their ships. It is the retailers that will ultimately have to bear these exorbitant shipping costs, but nobody wants to be short of supply, especially around the holidays.
It's the perfect storm. Since I clearly took my eyes off the prize and wasn't on these names from the moment container shipping rates started their post-Covid jump, I have to throw up my hands and say, "I missed it". For the common stocks. But there are other ways to gain exposure to container shipping companies.
Yesterday, I took a major position for myself and my clients in the 7.625% Series B preferreds of Costamare. They were trading at about 96 cents on the dollar when I bought them, so, yes, I now have exposure to a leading player in a shipping sector that is seeing a generational increase in rates...and an 8% yield to boot.
Costamare's Series B preferreds are currently callable (other Costamare preferred series are not yet callable), but, darn it, I wanted that 8% yield in a world in which the 10-year U.S. Treasury note is yielding a whopping 0.92%. We'll see if Costamare calls those preferreds, but the next payment date is 1/15, and, barring a call announcement, you would have to pry (CMRE-B) and its massive quarterly preferred dividend payouts out of my cold, dead hands.
So, buy some CMRE-B and you will have plenty of mindspace to enjoy your holidays. Merry Christmas!
(Amazon and Walmart are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
