Long-time readers know I have been writing about the containership and freight trade since May last year. I recommended Zim Integrated Shipping (ZIM) and Knight-Swift Transportation (KNX) as technical trade ideas back in September. I followed that up with my Zim model and write-up on November 30, 2021. You can see how my thinking evolved on this trade along with the price action.
I got the early April sell-off wrong. In retrospect, I should have heeded the price action and got out, regardless of cash flows or other fundamentally bullish factors. However, I should also point out that the same logic applied to almost all my positions. Sell in March and go away, come back in September. Easy to see that in hindsight.
So, what now?
I think Zim has a massively bullish setup.
It is the most shorted stock in the shipping space, with Atlas Corp (ATCO) a close second.
Interactive Brokers Fundamentals Explorer has a tab which tracks short interest. According to their data, 68% of loanable shares have been utilized for shorting. That’s a massive figure, and a lot of future buying power which is very bullish for the long-term.
But I’m a trader, so the long-term doesn’t interest me as much.
The massive short position was put on during 8/17 due to the Q2 earnings “miss”.
Even with that heavy volume, the shorts couldn’t drive down the price much. From 8/16 to 8/19 close, they merely managed a hit of $1.78 or 3.5%.
Since the July low, the primary trend (higher highs and higher lows) is up on the daily chart. Note that even with the volume pick up, the Bollinger Band Width was flat. Pull up the chart and you can see volatility breakouts on previous down moves. We haven’t seen that this week. Suppressed volatility leads to hyper volatility. While BB width doesn’t indicate direction, it does indicate a move coming. If high volume shorts didn’t manage to move the share price down, and the primary trend is up, my thinking is that the next move is explosively higher.
Hmm, sounds good. But Kashyap, I’m a trader so I don’t care if the setup looks good. The market looks bearish, the Fed can do this, the dollar can do the other thing, and it can all go to zero. Maybe the shorts get the longs to capitulate during the next down move in the markets. Who the hell knows what’s going to happen. Spare me all that crap about valuation and ZIM being a 1 PE stock. 1 PE stocks can go down 50%. 500 PE stocks can become 1000 PE stocks. Anything can happen in the markets and valuation is not a timing tool.
Ok, fair enough. Here’s a timing tool. Zim goes ex-dividend on 8/26. The company has declared a regular quarterly dividend of $4.75. If you’re short a stock when it goes ex-dividend, you’re on the hook for the dividend amount. Let’s say you shorted shares at $48 on 8/17. Hold that short past 8/26, and your breakeven price moves all the way down to $43.25. True, the stock price usually drops by the dividend amount, so the cash outflow is offset by the capital gain on the short. However, that’s not guaranteed.
Shipping is the land of surprises. When Dorian LPG (LPG) announced a special dividend of $2.5 in May, the stock initially dropped by the dividend amount but then went on a rip-roaring rally.
Zim short sellers are taking a risk if they hold on until the 8/26 close.
Zim dividends are subject to 25% Israeli withholding tax. Some long-term investors exit prior to the ex-dividend date and re-buy to avoid the hassle of claiming tax credit. There is no way of knowing what percentage of long-term capital is on the sidelines waiting for the stock to go ex-dividend, but I am aware that this dynamic exists, which results in additional buying power coming in for the stock on 8/29.
I suspect we’re going to see short covering as early as next week.
To recap:
ZIM is a 1 PE stock with a stated policy of returning 30-50% of net income as dividends each year.
The primary trend is up.
Potential band squeeze break-out setup.
An imminent short covering rally is highly probable.
Long ZIM is my top trade idea on a two-week timeframe.