Weekly rollup | Aug 15-21 2022
- Aug 22, 2022
- 8 min read
Updated: Aug 15, 2024
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), Matson Inc (MTX), ProShares Short Bitcoin Strategy ETF (BITI), S&P E-Mini Futures (MES)
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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
August 19 2022
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)
Good Trading!
Kashyap
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