Warren Buffett once summed up his approach to investing as "Be
fearful when others are greedy and greedy when others are
Great advice, but with bonds plunging on higher rates and
stocks bouncing higher as the rest of the market becomes greedy,
what is an investor to do? Being fearful means bond losses, but
being greedy means leaving yourself open to the next market
Maybe what the Oracle of Omaha should have said was, "Be
fearful in sectors where others are greedy and greedy where
others are fearful."
Of all the sectors to feel the weight of the Great Recession,
shipping may have been the hardest hit. Global trade plummeted
23% in 2009 for a loss of $3.8 trillion in import value, the
biggest one-year drop on record.
Trade bounced briefly but fell again last year as weak global
growth held back exports. Unlike the rest of the market, which
has fought through concerns of sluggish global growth to post
returns of 15% since the beginning of the year, global shipping
has been falling like a rock since February and is down double
Global merchandise exports have grown by an annualized rate of
7.7% since 1990, according to the World Trade Organization, with
the average increasing to 10% over the past decade.
In fact, trade growth has been negative in only four years out
of the past three decades. If others are fearful for stocks of
shipping companies, I'm going to be greedy.
Stronger Trade And Higher Prices Ahead
Real GDP in the 17 economies of the eurozone grew by a 1.2%
annualized rate in the second quarter after six consecutive
quarterly declines. Even better for shipping companies is that
real exports of goods and services exploded higher at a 6.8%
A jump in August export orders helped push China's purchasing
managers' index to its highest level since May. Exports increased
7.7% over the previous year, well ahead of the 3.8% growth
reported in July.
A rebound in global trade should lead to some decent gains for
investors in the general sector, but I wouldn't spend all my time
analyzing stocks for decent gains. I only invest a small
percentage of my personal portfolio in stocks with strong upside.
I want to see returns of 20% or more a year.
There is one particular shipping company of which investors
are being especially fearful, to the point of hating it. I'm
Textainer Group Holdings (
, a container leasing company with 2.6 million 20-foot equivalent
containers, the largest fleet among its peers.
||Copyright © 2013 Textainer
||Textainer has taken advantage of weak global trade and
lower asset prices to double its annual investments in
property and equipment, which should boost cash flow and
income when exports turnaround.
Textainer is one of the most heavily shorted in the sector, with
traders betting on further weakness ahead and institutional
investors neglecting the shares. This widespread pessimism is not
completely without merit. Management made some missteps last year
and didn't manage the company's cost structure well. While
revenue grew by 15%, cost of goods jumped by 29% and operating
expenses surged by 37%, which sent profitability margins down
But the company is also being beaten down for doing the right
thing. Management has taken advantage of weak global trade and
lower asset prices to double its annual investments in property
and equipment. This should translate to a huge boost to cash flow
and income when exports turnaround. Cash flow could also see
support when the company scales back capital expenditures from
the current buying binge.
The company almost doubled its long-term debt outstanding last
year to $2.2 billion. While an abrupt increase in debt always
raises a few eyebrows, the move was a smart decision considering
a return on equity above 23% and interest rates around 5% on
The company derives more than half (56%) of its revenue from
Asia and one-third (32%) from Europe. More than 75% of the
company's containers are on long-term leases, making future cash
flow fairly easy to predict.
The company has increased the quarterly dividend 135% over the
past six years and pays a generous 5.4% yield. In fact, investors
buying the shares on the IPO in 2007 would now be receiving an
11% cash return on their original investment and a total return
As you can see from the summary data, my model doesn't depend
on the company making any huge leaps in terms of efficiency or
sales. Sales should grow by better than 9% a year on marginal
improvement in global trade, and the margins I've used are close
to long-term company averages. Higher depreciation expense from
the jump in asset purchases should be offset by higher revenues
from leasing these assets. Interest expense will increase
dramatically but will also save the company millions in
What is not shown here is the opportunity in free cash flow
for the company and investors. As the company starts to reduce
its spending on asset purchases, the increase in free cash flow
will go to pay off debt and increase the dividend payout. This
kind of improvement in financial health will go a long way to
improve sentiment in the shares.
My model estimates $3.59 per share for this year, 6% higher
than the average consensus, and for earnings to jump higher next
year to $4.08 per share. If this happens, the shares could easily
test the recent highs for a total return of almost 32% over the
next year and a half.
Icing On The Cake
Beyond the 32% upside target, there is a good chance this stock
could quickly go much higher.
Because of management's missteps, the company is one of the
most hated in the space. Investors have borrowed and sold short
2.3 million shares, amounting to almost 11% of the shares
available for trading. That compares with short interest of just
3.9% in closest peer
CAI International (
Shorted interest, which must eventually be bought to cover the
position, could be unwound gradually as the global trade
environment improves, pushing the shares up slowly. On the other
hand, this level of borrowed shares has a good chance of becoming
a short squeeze where all the shorts cover their positions
quickly, sending the price surging.
To see how the situation could quickly turn into a short
squeeze, consider the ownership in the shares. Almost half of the
shares (48% ) are owned by Halco Holdings, which will probably
not sell. Another 33% are owned by institutional investors who
know the stock's potential and will wait for big upside. Another
18% of the shares outstanding are owned by mutual funds that do
not trade often.
This ownership amounts to 99% of the shares outstanding,
leaving the 2.35 million short positions in trouble if they have
to buy back the borrowed shares in a hurry. The shareholders will
be able to demand a very nice return.
Risks to Consider:
Global trade has yet to fully recover and could see meager
growth this year. Investors may need to wait for demand in
container shipping to turn around but will receive a strong
dividend in the meantime.
Action to Take -->
Shares are worth $42.84 based on 2014 estimated income and could
go higher on a change in ownership and sentiment. This could be a
potentially great buy at current levels with profits taken if
shares approach my target price of $42.83 per share.
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