Grindrod Shipping (GRIN), which we closed during the June carnage broke out on reporting Q2 earnings. We exited at $19.25, which was well-timed since the share price proceeded to sink to a low of $14.32. My buy alert was triggered when the share price recovered to $19, but I didn't take the signal since $BDRY has taken a knock out punch and holds the title for the worst performing sector this year. Even worse than ARKK, bitcoin, SPACs, marijuana and Chinese tech stocks. GRIN broke out on the Johannesburg exchange yesterday (8/18) and followed through in the US on high volume (654.5k shares vs 10-day average volume of 176.8k and 3 month average volume of 301.6k). Sometimes, the shipping stocks which open well in Norway fail to follow through once US opens, so this was a pleasant surprise for me.
I don't like to argue with breakouts. Like them or not, the price action conveys something. GRIN had a classic textbook style breakout which portends imminent higher prices. Even better, the stock cleared the 200 day moving average ($19.9), which means it's now on the radar of trend followers. Gaps tend to be filled, but that's not a certainty. And it may even happen after the entire move is over, so the gap higher doesn't bother me.
The Q2 results which led to the breakout was... meh. Totally unimpressive. I say this because low PE growth stocks are a dime a dozen in shipping. Yes, GRIN reported $2.81 in EPS for Q2 and $4.42 for H1 2022. Yes, the share price is a mere $21.7, which is an annualized PE of 2.5x. The company has a young, ECO fleet which means it gets high priority on any charter. If the current rate of profitability continues, the company can wipe off all its long term debt with a year's worth of net income. The company has an impressive 40% return on equity, based on my back-of-envelope calculations. That's rare outside shipping but well, it's shipping. Valuation-wise, containerships are way cheaper (like $ZIM with a 2022 PE of 1x).
Capesize (biggest dry bulk vessel) rates have collapsed. Iron price prices have collapsed and aren't likely to recover unless China bails out their real estate sector. Wheat has collapsed so hard that retail speculators who got sucked into the well-peddled story about halted Ukrainian exports are having dark thoughts at night. GRIN operates smaller vessels and the market for smaller vessels is OK for now, but I have my doubts about how long that lasts. GRIN is 90% spot exposed, which worked well so far, but is going to be problematic going forward. The stellar earnings reported YTD may have been the peak. In shipping, things can go downhill fast.
GRIN can survive the downturn, and management is probably among the best in the business. Insiders hold 38.5% of the shares outstanding, institutions hold 29.2%. That's two-thirds of the company in strong hands. The valuation and ownership structure are a positive. Shorts will pick other dry bulk operators before they go for GRIN, which means it has a buffer against moving down with charter rates.
It comes down to the pros (breakout, valuation, management and ownership structure) vs. the biggest con (dry bulk has fallen into the toilet bowl, but hasn't yet been flushed down).
Tough call. I call it a Buy because I don't argue with breakouts. I'd rather sell later and take the loss than argue with a breakout like this. Initiating a Buy at the open today. If this works, this works right away. If not, the 20 EMA presents a natural sell stop.
Good Trading!
Kashyap