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Shipping Stocks: Keep It Simple

By: Martin Tillier
Posted: 3/14/2014 12:15:00 PM
Referenced Stocks: CMRE;NM;GLNG

In the modern world, where information is freely available at the push of the button, we all, as investors, are prone to making the same mistake; we over-complicate things. The abundance of indices, insight and information available to us leaves us with the feeling that there is always something more... something we have missed. This causes us to look for ever more esoteric reasons to invest and ever more complicated strategies.

Pundits like me are guilty of propagating and perpetuating the belief that complicated is best; we have, after all, an interest in convincing everybody that that is the case. In most cases though, the old KISS (keep it simple, stupid) rule is still worth remembering.

To me, when it comes to long term investing in stocks, that means looking at a few basic things. The company should be in an industry that I believe will, in the grand scheme of things, have a decent couple of years, even if it is under short term pressure. I look for a reasonable forward P/E; the stock should be reasonably valued and I will get some reward for ownership, i.e. it will pay a dividend. For long term holdings, dividends are an essential. Research has shown that, over an extended time period, dividends account for over 40% of total stock market returns.

With the first of those criteria in mind, I am always intrigued when a whole sector comes under pressure. This usually means that, providing you think problems are temporary, some individual values can be found.

That is the case with shipping stocks right now.

A depressed Baltic Dry Index since the end of last year and pessimism about sustained Chinese growth are usually listed as among the reasons for shipping stocks' most recent declines, but the Baltic Dry has begun to recover lost ground and, as I have said many times, China is still growing even if it is only at 7.5 percent or so. Recovery from credit crises takes time and, while there will be bumps in the road, we are still in that recovery period globally. I cannot believe that trade is about to collapse. In that environment it is reasonable to expect the sector to do OK.

One would think that rapidly rising interest rate could be a risk to the highly leveraged sector going forward, but part of the reason for the drop in the Baltic Dry was oversupply as ships ordered and financed to take advantage of ultra low interest rates come online. This minimizes the effect of any future interest rate increases, at least from the increasing cost perspective. You still may see some weakness as the dividends paid become temporarily less attractive if this comes about, but nothing to damage the long term profitability of the holdings.

So, if we believe that shipping will be OK in the long run and want to take advantage of current weakness, where should we turn? These three stocks all fit the bill.

Costamare (CMRE):

I have long been a follower of this Greek-based company. Indeed, one of the first articles I wrote for recommended the stock at around $13 with an 8.8 percent yield back in 2010.

Interestingly, even as shipping as a whole has shown weakness over the last couple of days, CMRE has been basically flat, suggesting some underlying strength. It fits the criteria for a long term investment with a P/E of under 12 and a dividend yield over 5 percent.

Navios Maritime Holdings (NM):

Navios, on the other hand, has come off with other stocks. It has dropped to right around the $10 level that provided resistance in January and February, so some short term support around here can be expected. Of course, while that gives a little more confidence in the entry point, it means little over the long term.

NM, however, also fits my criteria for a long term investment, with a P/E of 11.5 and a yield of 2.37 percent.

Golar LNG (GLNG):

My third choice is not a pure shipping play. Golar LNG, as their name suggests is a company that specializes in liquid natural gas. Most of us are aware of the boom in production of LNG in the US and elsewhere, but, like oil, it is a global market and must be shipped in specialized vessels. GLNG is expecting to nearly double its fleet of 13 such vessels this year, with 11 more expected to begin service.

Although a little more risky given the relative modernity of the LNG market, they also fit as a long term investment with a forward P/E of 6.4 and a 4.6 percent dividend yield.

Starting from an assumption that global growth, while slow, will continue and that fuel costs for shippers will be capped by increasing supply from shale oil, shipping looks to me like a decent investment over the coming years, despite some short term volatility. If you agree, then keeping it simple and looking for dividend paying stocks that are reasonable value is the best way to go. The three above may not be the kind of thing that will double over the next year, but over a longer time frame I believe that holding all three and reinvesting dividends will be a decent strategy.