Weekly rollup | Aug 15-21 2022
Stocks Mentioned: International Seaways (INSW), Teekay Corp (TK), EuroDry Ltd (EDRY), Ardmore Shipping Corp (ASC), Hafnia (HAFNI.OL), Global Ship Lease (GSL), Danaos Corp (DAC), Valero Energy Corporation (VLO), Zim Integrated Shipping (ZIM), Silvergate Capital (SI), Customers Bancorp (CUBI), SVB Financial (SIVB), Grindrod Shipping (GRIN), Knight-Swift Transportation (KNX)
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August 15 2022
International Seaways (INSW) has moved from $20.18 when I wrote the above (5/9) to $28.48. In hindsight, I should have put on a long trade but at that time it wasn't obvious to me. A poison pill is not shareholder friendly. It allows management to stave off hostile/activist shareholders, which allows insiders to entrench themselves further. It is usually adopted when a management team living high on the hog doesn't want to lose control and subsequently lose their jobs. In this instance, the poison pill didn't hurt the share price since rising product tanker rates (INSW reported Q2 EPS of $1.38) diverted investor attention away from it. No regrets on the missed trade.
Buy Teekay Corp (TK)
Teekay is the parent company owning 10.57 million shares, or 31.2% interest in Teekay Tankers ($TNK). The company reported 6 cents in EPS for H1 2022 and trades at 0.63x book value. The company has a market cap of $359.1 million and working capital of $394.8 million. The consolidated balance sheet includes equity held by non-controlling interests, i.e. non-TK shareholders, so roughly 50% of the working capital can be attributed to TK. That's still a sizable cash hoard. The company intends to put $30 million of that to work in repurchasing its shares. Last week, shares broke out and triggered a breakout buy signal on the weekly chart. We will use today's bearish open to add shares at $3.56.
Dry bulk is having a terrible day and year, but at some point the value is just too compelling to throw in the towel. EDRY is trading at under 30% of NAV. That's such a huge margin of safety that it's worth waiting for the rebound. I recommended ASC back when it was in a similar situation and was well-rewarded. I still believe in the long EuroDry trade.
August 16 2022
Hafnia (HAFNI.OL) has increased its authorized share capital by 25%, allowing for the creation of an additional 150 million common shares " in order to provide the Company with a greater degree of flexibility in structuring transactions and to issue new shares in connection with fund raising opportunities as and when they arise."
Companies usually do this as a precursor to announcing a transformative M&A deal, or to raise capital for asset acquisitions. Something big is likely brewing at Hafnia. I'd steer clear of the stock since it is grossly overvalued.
"The biotech-stock selloff has run so far that many companies are now worth less than the amount of cash they have in the bank.
Nearly 200 such North America-based companies have negative enterprise values, meaning that their liquid assets are worth more than their market values, according to data compiled by Bloomberg."
The bounce in $XBI could actually turn out to be a sign that the sector has bottomed and started a new uptrend.
Stopped out of the MES short at 4306.5. Still holding BITI
August 17 2022
Global Ship Lease (GSL) confirms that TCE rates for its vessel categories are well above the historical averages. There is a gaping disconnect between the stock's valuation and the company's financial position. Just a matter of waiting for the market to recognize this.
I just realized I never did issue a Buy recommendation on Danaos Corp (DAC) after selling into the Feb '22 blow-off top at $96. I did re-buy in March and have continued trading the stock. I want my Track Record on this page to reflect the actions I'm taking in my personal account so I'm adding DAC as a Buy at today's open.
Sell BITI at the open. This week hasn't panned out as I expected, so I'm cutting this trade.
Cover the VLO short. The stock is rangebound but the price has cleared the 20-day EMA and more importantly, the 100 DMA. Based on entry at $120 and exit at $116.75, including a 98 cent dividend, the trade gained 1.9%.
Zim Integrated Shipping (ZIM) reported Q2 net income of $1.34 billion ($11.07 in EPS), an increase of 50% year-on-year. The company declared a quarterly dividend of $4.75 per share, and re-iterated previous earnings guidance of adjusted EBITDA of $7.8-$8.2 billion and adjusted EBIT of $6.3-$6.7 billion. Current market cap: $5.68 billion. Share price: $47.32. At its low point today, the stock was down 10% from yesterday's close! Crazy move, considering the quarterly dividend alone equals 10% of the share price, and this is with a dividend payout ratio of 0.43x. The company has a stated policy of returning 30-50% of net income in dividends.
The first half financials make the price action look even more ridiculous. Free cash flow of $3.1 billion, EPS of $25.26, EBITDA margin of 65%. This is a cash flow machine. The market is punishing the stock because freight rates have come down from record highs. Zim's average freight rate/TEU was "only" $3596 in Q2, as compared to a record $3848 in Q1. For comparison, the average freight rate per TEU was $2786 in 2021, $1229 in 2020, $1009 in 2019, $973 in 2018, and $995 in 2017. Big daddy Maersk reported an increase in rate of 9.4% sequentially and 64% year-on-year. ZIM reported a sequential decrease in rates of 6.5% and an increase of 53.6% yoy. You could say they didn't outperform Maersk, and that's a negative. Still, the stock is crazy cheap.
I don't want to average up (we're still up 27.8% on this position since entry, including dividends), but I think I'll consolidate my liner bets by selling stupid cheap Matson ($MATX) and roll that cash into batshit crazy cheap Zim. I still like MATX but if I have an opportunity to sell a 2.5 PE stock and use that cash to buy a 1 PE stock with a 30-50% annual dividend yield, I'll take it.
Question: I have surplus cash. Can I just buy $ZIM?! [instead of selling $MATX and using the proceeds to buy ZIM]
There's always the probability that I'm wrong on the containership trade. By wrong, I don't mean wrong as in the trade won't work (mathematically impossible to lose money over 5 years if you get enough in dividends to recover your capital) but wrong as in the containership trade continues to underperform. A healthy respect for risk means acknowledging I could be wrong, so increasing exposure to ZIM today and maintaining exposure to MATX as well takes your allocation higher. Are you fine with that?
Do I still see upside in MATX? Yes, most definitely, as I've re-iterated post their Q2 earnings release. The suggested trade merely replaces a 2.5 PE stock with a 1 PE stock, giving you more earnings per dollar of investment. What does this mean? $2.5 invested in MATX yields a dollar in earnings (and ~3.7 cents in dividends), while $2.5 invested in ZIM yields $2.5 in earnings (and 75 cents to $1.25 in dividends). That makes ZIM a superior bet, but concentration in a single stock poses risk while diversification within a sector mitigates single stock risk but still helps you retain exposure to sector upside. So this is a portfolio level call.
I'm selling MATX for the same reason I sold Knight-Swift Transportation (KNX). There's only so much I can allocate to the freight trade and back then, I chose containerships over trucking. Now, I'm choosing within containerships. The difference lies in trading an actual portfolio with hard capital constraints vs liking a stock as a security analyst.
Hope that helps.
Buy Silvergate Capital (SI)
Silvergate is a proper US bank servicing the crypto economy. My guess is the company posts a 2022 EPS of between $3-$4. I'm guessing it's around $4, $3 being very conservative. But we're not buying the stock for its earnings.
Silvergate operates the Silvergate Exchange Network (SEN), a platform for real-time settlement in USD and EUR between SEN clients. Like crypto, the network settles in real-time 24x7. The SEN network continues to grow its client base, from 1224 clients and $11.11 billion in total deposits in Q2 2021 to 1585 clients and $13.3 billion in total deposits in Q2 2022. Like crypto exchanges, the company makes money off fees, not directional bets. Deposits on SEN are subject to a deposit fee and are non-interest bearing for the clients, so SI gets to keep the interest income. Silvergate also provides crypto collateralized loans, like the (in)famous MSTR loan that made waves in June. The interest rate ranges between 6-7% on bitcoin loans, which is higher than the 30-year mortgage rate, and the collateral is superior to a house since foreclosure isn't an easy process but selling bitcoin is quick and easy.
Silvergate is exploring issuing a USD backed stablecoin. The company says it has the legal all-clear to do so. From the Q2 earnings call:
"So, as we've discussed in the past, we started down this path of looking at issuing our own stablecoin from the perspective of, would it be legally permissible for us to do so? And we did the legal analysis, this goes back a couple of years now, we engaged with the regulators and we came to the conclusion that it is in fact legally permissible. And the guidance -- the President's Working Group report that was issued on November 1st of last year 2021 reinforced that belief that in fact it is legally permissible. And in fact there -- that report indicated a preference for stablecoins to be issued by insured depository institutions.
And so the -- in terms of is there additional regulatory guidance that's needed? We don't believe so. It's really all about the design of the product, who is going to use it in the pilot, et cetera. And so those are all things that we are working on and we are certainly engaged with our regulators as we design the product. But we don't believe that there is any specific guidance that's needed. We will continue to take into account the guidance that comes out as it's issued. But we are moving forward based on the guidance that exists in the market today."
Yesterday, the Fed came out with a press release on guidelines to be followed by regulated banks engaging in the crypto space.
The guidelines mention USD stablecoins, but nothing in the press release explicitly proscribes banks from expanding their crypto related activities. There's uncertainty for sure, but that's also why there's opportunity in SI shares. The company says they can go ahead and issue a stablecoin. The Fed hasn't said they can't. And even if it transpires that their stablecoin attempt fails, they can still grow the SEN network. SI is ahead of competitors Customers Bancorp (CUBI) and SVB Financial (SIVB) in terms of network effects.
The crypto sector has seen a washout. I could buy a bitcoin miner, but I see that as higher risk than SI. Coinbase is a no-go, with the company guiding a 2022 EBITDA loss of over half a billion dollars. SI could potentially have something going for it. In the right market, a stablecoin launch, plus rising SEN customer activity, plus bitcoin-backed loans, plus rising net interest margin, and growing EPS presents an opportunity for share price appreciation from both multiple expansion and genuine growth.
I consider this a high-risk trade. Official entry is at $100.
August 18 2022
In India, there's an ancient tale of a king who became a sage in order to assuage his ego. King Vishwamitra coveted a cow belonging to sage Vasishta. When the king asked the sage to hand over the cow, the sage refused saying the cow wasn't his property to hand over. Being a king and all, he attempted to take the cow by force and was defeated by the cow's army. Humiliated by the defeat and consumed by his quest for the cow, he spends several years acquiring a powerful weapon from the gods. Part two is a repeat of part one; he is defeated again and is left feeling even more humiliated. By now, his desire to extract revenge is all consuming, and he forsakes everything in order to become a sage exactly like Vasishta. When he finally gets there, Vashista initially refuses to acknowledge him as an equal but finally relents and does so. The entire story is quite worth reading - their rivalry and how they go about it puts the plot of Mean Girls to shame.
I've not had a good year in the market. Every day on Twitter, I see folks bragging about their performance and their amazing trades with no drawdowns. I covet those returns, much like the king coveted the sage's cow. But is it worth my while to try and mimic their trading style in order to get there? Not in the least! First of all, those returns are probably fake. Maybe they had one good trade out of ten and are bragging about it. The folks who are up 50% ytd may have been down 50% in 2021. I don't know their history. FinTwit is a lot like Instagram, you are constantly exposed to the best side of the people who are temporarily successful. Real, successful traders only post occasionally; they are too busy making money (when they do post, they talk about setups and risk/reward in particular trades).
Everybody wants a butt like Kim Kardashian, but all we do is look at it and then go about our lives. FinTwit should be no different. Sticking to the analogy, the boastful tweets are actually not even as good as Kim's butt. At least you know that Kim has to put in the work to consistently look glamorous. FinTwit posters will keep rotating, as one style goes out of favor and another style comes back in favor. That's why you see the energy bulls staying quiet now, while the traders on the short side have made a comeback. Before energy, it was shipping, and before that it was commodities, fertilizers, NFTs, crypto projects, the exponential age, uranium, the gold miners, and so on. Peak boasting nearly always coincides with a top for that particular style of trading/ positioning.
Don't be a Vishwamitra; don't covet what the posters have; don't go on a fruitless quest out of a false sense of ego; don't change your strategy or trading style just for the sake of Keeping Up with the FinTwit-ians. Vishwamitra forgot that he was a king, forgot everything he did to get there, forgot the power he wielded, forgot his people, all his wealth and property, all that he had acquired until that point in his life, and changed his life completely just to acquire a cow and some peer recognition. The story doesn't make a moral judgement on whether the quest was worth it, but try asking a successful trader if it would be worth their while to forsake everything that made them successful in order to revenge trade and mimic a different trader's style.
The best traders stay true to their style even amidst drawdowns - that's how they get out of those drawdowns and continue to compound at a high CAGR over the long run.
Next time you're feeling performance pressure based on what you see in the media, just spend some time watching reality TV instead.
Pic courtesy of Jason. Every strategy, even wildly successful ones, have drawdowns. They are unavoidable. Not a reason to switch styles mid-stream.
Ridicule follows fame just as panic follows euphoria.
August 19 2022
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.
August 20 2022
August 21 2022
Positioning as of this week's close. I have an outsize ZIM position, on which partial stop losses (2 and 3 14-day ATR) have been entered in the market. Don't read too much into the allocation this week since I've cut down size in a lot of other positions to provide room for the ZIM trade.
Having tripled this year alone, Europe’s benchmark spot TTF gas prices continue to spiral out of control, currently trading at €240 per MWh, or $78 per mmBtu, some $20/mmBtu higher than LNG prices in Asia.
Russian pipeline gas supply to Europe remains severely curtailed – the 720 GWh/d of deliveries that this month has seen so far are a mere quarter of what they were at this time around in 2021.
In addition, maintenance at one of the largest Norwegian gas fields Troll, expected to last until the end of this month, has shrunk the market further, as have extremely low Rhine levels.
The market does not expect a quick recovery in prices, with the TTF contract for the calendar year of 2023 currently trading at €225/Mwh, only €15/MWh below front-month levels. (Source: OilPrice.com)