Weekly rollup | May 09-15 2022
Stocks Mentioned: International Seaways (INSW), Valero Energy (VLO), MPC Container Ships (MPCC.OL), Scorpio Tankers (STNG), Hafnia (HAFNI.OL), Ardmore Shipping (ASC), Sprott Physical Uranium Trust (U.UN)
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May 09 2022
International Seaways (INSW) has adopted a shareholder rights plan, otherwise known as the poison pill, to stave off hostile bids. Companies usually do this when they get wind of a hostile takeover attempt. In this case, it appears to have been triggered by a 13-D filing by Cobas asset management which has taken a 4.6% stake. Another shareholder has a 17.2% stake. INSW might now be in play.
"It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.
All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable dont's. I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn't be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself. A man must believe in himself and his judgment if he expects to make a living at this game."
- Reminiscences of a Stock Operator
Plan your trades and trade your plans. A losing day is not a reason to sell everything and go to cash. A bear market in the tech stocks or biotech stocks or even the S&P 500 is no reason to alter plans mid-course. If I'm in trades where I see the fundamentals deteriorate, I'll take the loss and exit. If I'm in trades where I get stopped out, I'll exit. I'll not exit all my trades based on a single down day in the markets. For a firm like Citadel or Renaissance, drawdowns are an aberration because their trading style precludes it. For a discretionary trading style like mine, drawdowns are inevitable.
I still like the containerships (ZIM, MATX, DAC, GSL, MPCC.OL), the gold producers (GOLD, LUG.TO, AXU, although I may cut AXU if they don't update on commercial production in their Q1 results due on 12-May), the gold explorers (SKE, MOZ.TO, DSV.V, GSV, and new addition ADZN.V), iron ore (CIA.TO), uranium (URG, YCA), dry bulk (GRIN), freight (KNX), LPG carriers (BWLPG.OL, LPG) and the two short trades (CACC, STNG). I'm steering clear of the oil and product tankers for now, other than the STNG short position. We bagged nice gains on those stocks with well-timed exits, but with various parties fighting over control and possible M&A activity looming, I am staying on the sidelines. DHT looks great valuation-wise, but the company has rebuffed acquisition efforts successfully in the past, so it's not obvious that the valuation gap will close anytime soon.
No new trades or changes in strategy for now.
This sums up why I continue to be bullish on freight and containerships. The Freight Baltic Container Index (FBX) reflects the container spot rates on 12 trade lanes, covering 80% of global container trade.
May 10 2022
Short Valero Energy (VLO)
Valero is a Texas based refiner which owns 15 petroleum refineries located in the U.S., Canada, and the U.K. with a combined throughput capacity of approximately 3.2 million barrels per day, as well as interests in ethanol and renewable diesel plants. The company will go ex-dividend on May 12, the quarterly dividend amounting to 98 cents per share. Q1 was the company's best quarter in 7 years, with net income of $905 million or $2.21 per share. The company is benefiting from the record crack spread, which is at levels not seen in recent decades (yes, decades, see article below). Recent trading has seen VLO's market cap surpass PSX and MPC.
Why short a strong stock in the strongest sector of the market?
1. Valuation concerns
From the company's Q1 2022 earnings call:
"Manav Gupta - Analyst, Credit Suisse
I'm going to try for one. I'm not sure if I get the answer, but it's my job to try. So if we go back a decade, 2015 was the best year in earnings. And let me know how if I'm wrong, but I think you made over $9 in EPS in '15. So when we move forward today, first quarter 2.31. The next two quarters, most of us who really believe in Valero believe there's like an $8 or $9 EPS number hidden there combined for the 2 quarters. And then the last quarter is generally our strongest. So that's another 2.50. We put all three things together this high that will be achieved in 2022 will be materially higher than the 2015 earnings number. If I'm thinking about it right, can you comment about how the management is thinking about a record high earnings in over a decade.
Joe Gorder - CEO
So Manav, I'll just say that -- I said it earlier, we live one day at a time. And we certainly like your thinking and your mindset. And frankly, I think everything you've heard from the team this morning is that things look constructive on all segments of our business right now. And so we're optimistic, but we don't cut our chickens before they're hatched. So we'll continue to do what we do, and that is coming every day and try to operate safely and reliably in an environmentally responsible way and to optimize to the extent we can. And if we just keep doing that day after day after day, I think we're going to find ourselves in a really good place."
The analyst's projection is for around $13 in EPS for 2022. For context, the EPS was $2.27 for 2021 and negative $3.5 for 2020. Using the analyst estimate EPS, the forward PE on this stock is 9.2x. It looks alluringly cheap. However, that valuation is based on peak margins and peak earnings. To take that as a benchmark means that we continue to expect record earnings in future years. There are several mega refineries coming online in Africa, the Middle East and Asia which make me doubt that record earnings will continue (picture below on refinery closures and opening by region). If EPS drops to a more modest $4, which is still high by historic standards, the stock's PE rises to 30x.
2. Parabolic topping pattern on the daily chart
Looking at the copper price makes me seriously doubt the stagflation thesis. If we are entering a period of slowing growth and slowing inflation, chances are crude oil has topped. Lumber and nat gas corroborate that view. If that's the right interpretation, oil should soon start to underperform. Price-wise, VLO moving below $115 would signal the start of a correction to the parabolic move but I'm confident enough in my assessment to front run the entry.
The analyst consensus is 18 buys, 1 hold and 1 sell, with an average price target of $121.74. The price target has been constantly revised higher as the stock moved up. For context, the price target was $90.44 one year ago.
Entering now with a stop just above the 52-week high of $129.27 gives a favourable risk:reward setup. The company has not been using its record earnings to pay down debt, so the leverage (debt-to-equity ratio of 0.7x) should add fuel to the move down if fundamentals deteriorate.
The stock is currently trading ~$120 and I'm short.
May 11 2022
I wouldn't be buying tech stocks while hedge funds are forced to liquidate positions. Tiger going belly up is a big deal since their positioning is bound to be mimicked by copycat hedge funds which will in turn be forced to cut.
Chart from GSL Q1 2022 earnings presentation -
May 12 2022
Sell MPCC.OL at NOK 26.10. Thanks to a well timed entry, the trade actually gained 3%. I still like this stock and the containership trade. This is purely a risk management move. If I had to pick one stock to sell among all my containership stocks (ZIM, DAC, GSL, MPCC.OL and MATX), MPCC would be the one to go. I'd like to see the stock rise back above the 100 DMA and market volatility to decrease before buying back in. Fundamentally, there's nothing wrong with MPCC or any of the containership stocks. I don't like letting this one go but as a trader, I can't get emotionally attached to any position.
The gold miners are getting slaughtered. YTD, we are down 50% on AXU, up 8% on $GOLD and down 7.4% on LUG.TO. I think LUG is a top takeover candidate, so I'm not worried about the position. Having one gold miner - Barrick - as a 'value' play makes sense to me. I consider it a defensive position in the current environment. Alexco (AXU) is problematic. It's a binary position - either they declare commercial production soon and the stock moves, or we exit and cut our loss. Note that none of the 3 remaining gold miner positions from the January 2022 AAO report are recommended for the leverage they provide to gold prices. That's a crappy notion - if you want leverage to the gold price you can buy the futures and gain ample leverage. Anyway, no changes to the remaining positions for now.
VGCX announced Q1 AISC of US$1504/oz and net income of US$12.67 million (20 cents). No change to 2022 outlook. I like the company, but I'm not impressed by management and wouldn't buy on the basis that the company manages to meet its cost and production guidance after a poor show so far.
May 14 2022
US gasoline prices have reached unprecedented territory this week, moving beyond $4.40 a gallon despite oil prices largely stagnating over the past weeks, indicating transportation fuel scarcity. Gasoline inventories continue to decline across the United States, falling for seven consecutive weeks already and hitting 225 million barrels in the week ended May 06.
We are short Valero Energy VLO (a top US refiner posting record profit margins) and Scorpio Tankers STNG (a product tanker company which is finally receiving decent charter rates), after exiting Hafnia HAFNI.OL and Ardmore Shipping ASC right as the record gasoline price and diesel shortage made mainstream news.
When I was still new to the shipping sector, I recommended buying the oil tanker stocks for TDV in April 2020, in response to news about oil being held in floating storage as a result of lack of demand and the futures curve being in steep contango. The tanker stocks topped out in less than a month and started a long, slow decline which they are yet to recover from. What I missed when I put on the trade was that oil demand would be slow to recover, and vessel earnings had peaked.
Back in September 2021, when the Sprott Physical Uranium Trust (U.UN) was making headlines, I decided to get out of the uranium trade. Uranium prices went higher from there, but uranium equities made modest gains before turning down hard and selling off even harder during tax loss season in December - which is when I re-entered the uranium trade via U.UN and caught the next leg up. What I got right was sentiment and liquidity - the hedge fund guys were shilling shitcos to retail investors, who were late to the party and were used for generating liquidity for the hedge funds looking to exit in size. The bottom during tax loss season, while uranium itself was going higher, provided a perfect re-entry. Sentiment back then was non-existent. Nobody was even talking about uranium.
I bring this up to make a point - while fundamentals absolutely drive trends, the money is made by gauging sentiment and liquidity and timing trades based on that. I could be wrong, but my sense is that sentiment has reached an extreme, or is close to reaching an extreme, for the refining and product tanker stocks. In Nigeria, which is an oil producing country, airlines are threatening to ground all aircraft and cancel scheduled flights unless the price of aviation fuel is decreased. The govt struck a deal with them, agreeing to supply fuel at 31% below market, with the state-owned oil company absorbing the hit. In India, air fares have risen 2-5x on popular routes. Record gasoline prices and news of diesel shortages are making headlines.
The cure for high prices is high prices. Unless demand continues to grow even as prices rise, i.e. we enter stagflation, the refining trade has peaked. And if you think stagflation is here, just pull up a chart of copper, palladium, lumber, zinc, iron ore and steel. Homebuilders and retailers are among the worst performing sectors of the market, while utilities and staples are holding up pretty well even as yields rise. During stagflation, retailers will be scrambling to build inventory since holding inventory would in itself be profitable - yet retailers inventory as a % of sales is currently at decade lows (see chart from May 9). The last time we had stagflation was in the '70s, and that was a terrible period for the dollar (remember Carter bonds denominated in Deutsche marks and Swiss francs?) and a great period for gold and silver. We're now seeing the dollar outperforming every currency in the world, including gold, silver, bitcoin, and the supposedly safe haven fiat currencies - Swiss franc and Japanese Yen. Stagflation? I think not.
No, we're simply seeing energy outperforming everything else during a deflationary collapse in asset prices and inflationary collapse of the real economy. Historically, high oil prices tended to be a harbinger of a recession. I think the timing is right to start fading the energy sector, with shorting refining and product transportation being the easiest way to express that view.
May 15 2022