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Thursday, 08 January 2009 |
 The overall market in 2008 was a complete washout, as was oil and the commodities complex. But not all was bad; there were positive segments, the U.S. dollar and treasuries just to name two. The chart below sums up the year’s performance in each of these areas rather eloquently. It’s our opinion, however, that real value will not be found in any of these areas in
2009. Sure, we expect the general equities market to appreciate – even
to rise with some ferocity. Yet within that realm there’s a smaller
sub-sector that should see some fantastic gains. It’s a segment that’s
been beaten down mercilessly, literally held underwater, all the
life-giving, oxygenating money literally wrung out of it. And in
keeping with the adage that the last shall be first, we believe this
segment has glorious days ahead.
2009: The triumph of the weak over the strong.
By now everyone is familiar with the chart of the Baltic Dry Freight
Index, a number issued daily by the offices of the Baltic Exchange in
London that measures the price of moving commodities by sea. Records
on the BDI go back some 250 years and have been important to market
watchers and economists ever since as a means of measuring the general
health of global trade. When the index is high, it means demand for
cargo ships is running at greater than average levels (with lots of
demand for raw materials); and when it’s low, little demand for
materials is in the pipeline.
This year’s BDI chart epitomizes what happened to world markets in
2008, and, as poster child for a worldwide economic recession,
describes what we all experienced better than any 1000 words on the
topic ever could.
The chart depicts a plunge unlike we’ve ever seen, and tells a tale of
woe, woe, woe on the water. Essentially, contracts for bulk shipping
evaporated, leaving the oceans filled with nothing but - pirates!
But things have been changing as of late, and though it’s hard to know
if they’re on a long term trend upward, we can’t imagine things getting
a whole lot worse for these folks. The BDI, after all, cannot go
bankrupt.
A Closer Look at the Shipping Business
There are a number of global shippers worth examining, and even a quick
search of the sub-sector on a stock screener/filter reveals tremendous
value. Here are a few names to consider:
Note that this is just a random selection of shipping companies with screen inputs of:
• P/E less than 10
• Dividend Yield greater than 10
• Yearly loss greater than 30%, and
• Trading below Book Value
It doesn’t claim to be a “buy list.” It’s offered merely to point out
that by all the standard metrics of value these stocks are extremely
attractive.
Looked at through a more discerning lens, however, one company stands out.
Excel’s fleet of 47 ships carries iron ore, coal, grain and steel
products (among others) to worldwide destinations, and the company has
grown sales every year from 2002 ($16 million) through last year (2007
– $141 million).
Excel has a relatively small market cap, which makes it conducive to a
punchy jump once the market starts heating up. Recent activity on the
stock reveals that may already be happening.
Add to this that as late as November of this year, with the company
literally underwater, the Board of Directors signed off on payment of
the quarterly $.40 dividend. There was no wavering or reluctancy:
Excel duly paid its shareholders. If there ever was a sign of
management confidence in its stock, that’s it. The size of the
dividend is equally appealing: a whopping 20.15%!
A technically solid picture here, with the 49 DMA about to be traversed
on better than average volume – and a good deal of accumulation in the
last thirty days.
Much of the blame for the drop in the major shippers has to do with the
fall of Lehman Brothers and those they did business with in Letter of
Credit financing – a uniquely important tool in the shipping business.
Now that liquidity is returning to the credit markets and the crunch is
easing, we expect to see others rush in to fill the void occasioned by
the loss of Lehman.
If you needed anything else to push you overboard, here it is: the company sells at a
measly 3x forward Price/Earnings. 2009 is expected to bring $2.70 per share. Current price of the stock is $7.94.
Another Option
For those who live in fear of selecting individual stocks for purchase,
you’re in luck. Claymore Funds offers SEA:NYSE, the shipping ETF.
Begun just this year in the midst of the BDI’s extraordinary fall from
grace, the SEA fund is chartered to correspond as closely as possible
to the Delta Global Shipping Index, with “at least 90% of its total
assets in common stock, American depositary receipts (“ADRs”) and
global depositary receipts (“GDRs”) that comprise [that] Index.”
The fund paid a total of $.442 over the half year, for an extrapolated
current yield of roughly 8%. Not bad for letting someone else do the
picking for you.
Source: Oxbury Publishing
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