Weekly rollup | Aug 29-Sept 04 2022
Stocks Mentioned: BW LPG (BWLPG.OL), Dorian LPG (LPG), Grindrod Shipping (GRIN), Zim Integrated Shipping (ZIM), Global Ship Lease (GSL), Danaos Corp (DAC), Champion Iron (CIA.TO), MPC Container Ships (MPCC.OL), Triton International (TRTN)
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August 29 2022
BW LPG (BWLPG.OL) reported Q2 EPS of $0.26 vs $0.41 in Q1. TCE rates for active vessel days decreased from $40.4k/day in Q1 to $35.4k/day in Q2. By contrast, Dorian LPG (LPG) achieved TCE rate of $39.3k/day in Q2. Operating cash flow went negative (-$14M) due to increase in working capital. The company appears to be trying to use dividends to gloss over the underperformance, declaring a $0.20 dividend. While this is still a value stock, I'm not impressed by the deterioration in TCE rates. I wouldn't be a buyer today whether the stock rips or dips.
Taylor Maritime Investment Limited (LSE: TMI.L) made an offer to buy Grindrod Shipping (GRIN) for total consideration of US$26/share, consisting of $21 in cash on closing, plus a $5 special dividend from GRIN. No wonder the stock bucked the bearish trend in dry bulk.
August 30 2022
That didn't take long. This is going to cascade across the energy sector as high inventories and backwardated futures curves meet plummeting prices. The longs had it coming.
Sell Dorian LPG (LPG) at the open. The LNG/ LPG/ nat gas trade is done.
Zim Integrated Shipping (ZIM) hit my $39.01 dividend-adjusted 2 ATR stop at the open today. I've cut the trading position based on the short interest/BB width thesis but am still holding the rest of my position. The short interest disappeared. IBKR now has 4.6 million shares available for shorting, from ~87k shares yesterday. This trade idea was a bust.
Sell Global Ship Lease (GSL). The company announced two vessel charters with Hapag-Lloyd and the stock has responded, up 5.3% for the day. That's a slightly better exit than hoped for.
Sell Danaos Corp (DAC).
If Zim is not able to gain any traction despite having a PE <1, I think it's time to reduce exposure to the containership lessors as well. At some point, value will work. I don't want to hold through the drawdown to get to that point. Time to cut and re-evaluate.
August 31 2022
The iron ore benchmark has dropped below $100/t. Does not sync with the hopeful picture painted in this article.
Sell Champion Iron (CIA.TO) at the open. Stock has a PE of 5 but it costs them ~C$93.5 (US$72) to produce a dry metric tonne. If iron ore continues dropping, margins are going to narrow. Costs are already rising, up from C$55.8/dmt in 2019 to C$62.8/dmt in 2021 to C$73.1/dmt in 2022 (YE March 31) to C$93.5/dmt for the last quarter. The company is delivering on growth, and fundamentally they are doing everything right, but traders are going to associate the stock with the iron ore collapse and the upcoming Chinese real estate collapse (looks like the RMB may be in for a devaluation).
This is a value stock, and one I really, really like. Just stepping aside for now to avoid an imminent drawdown. I'll absolutely be looking for a re-entry once the dust settles. For a refresher on why I like this stock, check out my initiation report.
Global Ship Lease (GSL) ended up 10.8% on Tuesday, on volume of 2.54 million shares which is over 3x the average. It printed a good looking green candle and just looking at that in isolation, I wouldn't have been a seller. But zooming out, the stock is in a downtrend. It fell below the 100-week MA in late June, broke above the 100 WMA for a brief period earlier this month, only to move below the 100 WMA again. I liked seeing the stock respond to the news on forward fixtures of their vessels - I want to see that strength continue for a while before re-entering. The weekly RSI crossing 50, a weekly close above the 20-week EMA, a daily close above the 100 DMA - any of these would do the trick.
My goal is not to buy and hold value stocks forever (GSL is worth at least $40/share, DAC is probably worth $120-$140/share). I want to put up good performance numbers at the portfolio level while limiting drawdowns as best as I can.
I cut Danaos Corp (DAC) for a different reason. The company owned 5,686,950 shares of $ZIM as of Q2. That represents ~17% of DAC's current market cap if they haven't sold any shares. Given my outsized Zim position already, this would represent a second way to get hurt if I get the Zim trade completely wrong. So my choice was to either cut my Zim position a lot more, which I'm not going to, or cut DAC. I'm hopeful that this price action will lead to a re-think on buybacks by Zim management. DAC management has a $100 million buyback program in place, of which they utilized $11.2 million in June and $13.9 million in July. To put that in context, DAC generated H1 2022 operating cash flow of $620.5 million, of which $71 million was spent on fleet renewal, which leaves free cash flow of $549.5 million. Their Zim holding, even at today's beaten down prices, is $236.6 million. They spent a grand sum of $37.4 million on buybacks and dividends for this period. $10-$15 million a month on buybacks, or a 75 cent quarterly dividend ($18.8 million on approx. 25 million s/o) just isn't going to cut it (I had DAC in mind when I wrote this tweet).
There are a lot of shareholder-hostile value stocks, run by management teams that don't realize they are stewards of other people's money. I suppose some CFOs get a thrill out of seeing the cash balance rise and don't want to share the wealth with real owners of the capital. Far too often in these cases, the cash gets used in harebrained schemes that end up destroying value.
DAC and GSL both have a lot going for them. GSL is rolling over debt, extending debt maturity at lower interest rates, paying decent dividends (17.8% payout ratio for H1 2022) and locking in some great long-term charters. DAC is cash-rich and should be a hostile takeover target given the level of cash build up. So I may flip long in a heartbeat if the price action changes.
Sell MPC Container Ships (MPCC.OL) and Triton International (TRTN). This leaves Zim as the sole remaining exposure to the containership/freight trade. If the Zim trade works, I'll look to get back to other containership stocks. If Zim doesn't work, I'll cut it and look to re-buy whatever looks strongest among DAC, GSL, MPCC, ESEA, CMRE, NMM, MATX. TGH and TRTN. For now, I want to have minimal exposure to containerships. I cut all the gold trades earlier this year, not because I stopped believing in the value proposition, but because the market clearly wasn't indicating an uptrend for gold stocks.
The gold trades lost 16.65% on average, but holding on and hoping would have resulted in a further 20.93% loss. Hope is not a trading strategy. I have no regrets for cutting the losing gold trades, no regrets for cutting the losing containership trades.
After cutting TRTN, MPCC and CIA, the portfolio will have 15 open trades. Markets are going to be volatile until the Fed provides clarity at its post-FOMC meeting press conference on September 21 (Wednesday) afternoon. Current market expectation is for the Fed to taper off $95 billion per month off its $8.9 trillion balance sheet, which works out to a 12.8% reduction in its balance sheet in a year. The Fed balance sheet increased from $4.2 trillion in Feb 2020 to $8.9 trillion in the span of two years, sparking global asset bubbles and consumer price inflation. Just as the market is hungover from the loss of Fed liquidity and rapid rate hikes, these unelected bureaucrats are now proposing to dump assets (treasuries and mortage-backed securities) in a declining market in order to ward off inflation. When inflation was picking up, it was 'transitory'. Now that inflation has peaked, inflation is the greatest threat and it is better to "bring some pain to households and businesses" (Powell's words) by eroding their wealth base.
This is going to be a difficult period to navigate. I'm going to stick to high conviction trades with wide stops.
You can check the trade history here
Fed Balance Sheet
Profit warning due to lower demand. Company is responding with production cuts and cost cutting but it's not going to be enough as inventory build up meets softening demand.
September 02 2022
The article exaggerates seasonal weakness but gets many things right. ZIM is now trading at less than cash on its balance sheet so even if rates collapse, the stock is still cheap. Worst case scenario, stock goes to zero but the dividends make us whole in the next 1.5 years. Or valuation starts to matter and the stock quickly re-rates.
A reminder that a lot can go wrong even on what appears to be a slam dunk trade.
September 03 2022
September 04 2022
When you catch the press and so called investors making fun of bitcoin and crypto, just remember that these are the same folks who didn't understand how Amazon could take over the world and grow exponentially. Human minds aren't good at exponential extrapolation.
Jumping off rooftops was common during the Great Depression.
The Nasdaq composite saw countertrend rallies of 22%, 24%, 37%, 18%, 22%, 30%, 47%, and 56% in 2000 and 2001. Something to keep in mind while looking at ARKK capitulation. This is not the time to initiate new short positions on ARK funds.