As the world reels from the news of the Ukraine invasion, the stock market has become embroiled in fear and uncertainty that many investors have not witnessed in many years. I am not the sort of person who likes to benefit from the detrimental impact of tragic events on other peoples’ lives, and I truly hope that the conflict is resolved quickly and without too much additional harm. On the other hand, when events beyond my control present an opportunity, I see no reason to miss out if it will not hurt others by doing so.
When you consider the ongoing supply chain disruptions from the unwinding of the Covid pandemic and rising inflation costs that are impacting many businesses across the globe, costs are going up and eating into profit margins. Many sectors of the economy have been affected and are likely to continue to be impacted well into 2022.
One clear example of that impact is evidenced by the recent report from Berkshire Hathaway (BRK.B). In the company’s 2021 Annual Report, I found 21 instances of the phrase “supply chain” and this summary of the consequences:
However, many of our businesses were negatively affected by ongoing global supply chain disruptions, including those attributable to major winter storms and a hurricane in North America, which contributed to higher input costs. We can not reliably predict future economic effects of the pandemic or when business activities at our operations will completely normalize. Nor can we predict how these events will alter the future consumption patterns of consumers and businesses we serve.
On the other hand, the shipping industry is one part of the global economy that has been realizing economic benefits from the ongoing supply chain disruption. From container ships to dry bulk, and integrated shipping / logistics, many shipping stocks have seen increasing revenues and higher margins. For example, container rates have been rising since early 2020 and especially in 2021 as shown in the chart below from Statista.
My Container Pick
Global Ship Lease (GSL) is my pick in the container sector and is one that has reaped the benefits of supply chain disruption with its 65 vessels that it leases out at increasing rates. For example, in January the company announced a new charter rate for one of its vessels, the Kumasi:
The vessel has been chartered at a rate of $ 38,000 per day. The new rate represents an increase of more than 300% from the vessel’s prior rate and is ~ 20% higher than multi-year charters agreed for two of Kumasi’s sister vessels during the fourth quarter of 2021.
In an article published in October 2021, SA contributor J Mintzmyer called GSL his top pick in the container sector. Although the share price has increased about 76% over the past year, it still trades at a good value with a forward P / E of 7.34 and pays a 4% dividend on top.
Wall St analysts and SA contributors also give GSL strong ratings with 4 WS analysts giving the stock a Strong Buy rating and an average price target of $ 29. The Quant ratings for GSL are also very good except for earnings revisions.
The earnings trend for FY22 shows an expected increase over the next 6 months continuing unabated. On March 2 the Q42021 earnings will be reported, and consensus non-GAAP estimates range from $ 1.15 to $ 1.37. In November, the average consensus estimate was $ 0.95, and the company reported $ 1.74, so I would not be surprised if the Q4 consensus estimate is also lower than what will be reported.
I am long GSL in my No Guts No Glory portfolio and planning to hold onto shares throughout 2022 at a minimum, unless something substantial changes in the business or the world at large. I would look to add more if the share price drops below $ 25.
My Dry Bulk Pick
The fallout from the Ukraine invasion will most likely have a double-edged impact on shipping as bunker rates increase benefitting tankers, but fuel costs increase along with the price of oil, which is the largest cost component of shipping. That could have the effect of reducing earnings even if revenues increase.
Dry bulk shippers had seen increasing rates in 2021 until October, and then fell back to the year ago level before starting to rise again in 2022, as illustrated by the Baltic Dry Index chart from Trading Economics.
After the conflict began in Ukraine the index pulled back and may level off in the days or weeks ahead before resuming its rise. Or if the conflict rages on and creates further disruption in the global economy those rates may start to fall again. This will be something to watch in the coming weeks as any change in the trend is likely to have a corresponding effect on the share price of dry bulk shippers.
My pick for the dry bulk shipping sector is Golden Ocean Group Limited (GOGL). With both Panamax and Capesize vessels in their fleet, GOGL took advantage of the higher TCE (Time Charter Equivalent) rates they were able to realize when they reported Q42021 results on February 16, 2022, leading to earnings of $ 1.02 per share – the best in the company’s history. The company has no debt maturities before 2023 and reported $ 243.5M in adjusted EBITDA in Q42021 compared to $ 229.7M in Q3 with $ 210M in cash at the end of 2021.
GOGL has seen over 106% share price appreciation over the past year and pays out an estimated forward dividend yield of 30% after raising the most recent distribution by ~ 6% to $ .90 per quarter. At a forward P / E of 7.9 there is still some upside price potential barring any substantial downward revisions to future earnings.
The Quant ratings for GOGL are also excellent, including the Revisions score of A- (down slightly from an A + 3 months ago).
Like in the case of GSL, the consensus for GOGL earnings in 2022 is to continue increasing for the remainder of the year before falling back in 2023.
I like GOGL and feel comfortable recommending the stock, but the share price has shot up post earnings and may retreat to a lower price given the ongoing conflict and global disruptions in Ukraine that could impact overall market sentiment. I am a buyer at under $ 12 and plan on holding the shares that I currently own. Similar to GSL, I will reevaluate near the end of 2022 to decide whether to continue holding GOGL into 2023.
Integrated Shipping and Logistics
My third pick for a shipping stock to leverage the rising rates and ongoing supply chain issues is ZIM Integrated Shipping Services Ltd. (ZIM). This integrated shipping and logistics company is based in Israel and benefits from an “asset-light” business model, where they lease the majority of their shipping fleet and container boxes used for carrying freight. They utilize lesser traveled shipping lines to avoid competition with some of the larger liner companies like Maersk or COSCO.
A more detailed analysis of ZIM post Q3 earnings was published on SA in December 2021 by J Mintzmyer, who knows far more than I do about shipping stocks. His recommendation at the start of 2021 was to buy ZIM and the stock has performed very well since that time when I first began to follow it. I started buying shares of ZIM in my NGNG portfolio in March 2021 and have traded in and out since then, but currently own enough to represent about 3% of my overall portfolio. The shares have appreciated more than 260% over the past year.
ZIM offers a high dividend yield in addition to the share price appreciation over the past year. In the Q32021 report they declared a $ 2.50 dividend and explained the dividend policy going forward:
Transitioned to Quarterly Dividend Payout, Declared Q3 2021 Dividend of $ 2.50 per Share, Representing Approx. 20% of Quarterly Net Income
30-50% of Total 2021 Net Income Expected to be Distributed in 2022
Because they are based in Israel there is a 25% foreign tax for US investors that is taken out of the distribution, so that is a bail for those who are concerned with such a tax. From previous comments I have read regarding ZIM and their dividend policy, that is something that investors may want to know before deciding to invest.
Wall St analysts are a bit mixed in their opinions of ZIM, with 5 Strong Buy, 2 Hold, and 1 Sell rating. The price targets range from a low of $ 43 to a high of $ 100.
The SA Quant ratings are much more positive with mostly A + factor grades.
The Growth factor grade is a concern and looking into it I discovered that the forward EPS projection is not encouraging. This is something that bears consideration as the growth prospects beyond 2022 are not clear at this point. As with the other shipping stocks I would look to reevaluate my long position in ZIM as we get closer to the end of 2022.
ZIM is expected to report Q42021 earnings on or about March 9 and I will be interested to hear what they forecast for the remainder of the year in terms of revenue and earnings projections. Until then, I rate ZIM a hold at the current price of $ 70 and a Buy if it drops below $ 65.
An ETF for Shippers
One other idea to consider if you do not want to do detailed research on individual shipping stocks is to consider a new fund from US Global Investors, Inc. (GROW), that went public on January 20, 2022. The fund is called ETF Series Solutions Trust – US Global Sea to Sky Cargo (SEA).
That ETF holds 29 equity positions in shipping and supply chain stocks with ZIM being one of the top holdings. That fund is not the subject of this article and is still quite new, so I have not done very much research on it. It is something to consider if you are interested in this investment space.
Ironically, one of my first published articles on Seeking Alpha was about a shipping ETF called SEA. It was the old shipping ETF from Invesco that had the SEA ticker at that time, which was April 2016. Since then, the SEA ticker has changed at least two more times that I am aware of, and now rightly refers to a shipping ETF again . And I hope that this time is different (better) than 2016 was for shipping investors in general! So far in 2022 it appears that the Shipping industry is once again a good place to invest in future growth and income.
I realize that there are additional opportunities in the shipping industry that other investors may prefer, and I am not making the claim that these 3 are the best. But I do believe in each of the 3 investments as solid picks for my own portfolio given my risk tolerance and objectives. If you have others you prefer, please reply in the comments. I am always open to suggestions and discussion.
Best wishes to all my readers, and please stay safe and help each other out during these difficult times.