While investors are understandably enamored by the huge moves in Internet stocks, cloud computing, and electric vehicles, shipping stocks have even larger gains. From last year’s bottom, the Breakwave Dry Bulk Shipping ETF (BDRY) is up 244%.
In contrast, the Invesco NASDAQ Internet ETF (PNQI), the WisdomTree Cloud Computing Fund (WCLD), and the KraneShares Electric Vehicles (EV) and Future Mobility Index (KARS) are up 125%, 181%, and 182%, respectively, from their 2020 lows.
Shipping has been a significant underperformer over the last decade. This is a key difference between it and these other sectors. Cloud computing, Internet stocks, and EVs outperformed over the previous bull market and already had elevated multiples.
Shipping’s New Bull Market
Shipping is a classic boom-and-bust industry, and 2003 to 2008 was a boom period. As a result of high shipping rates, companies aggressively built new ships. As the commodity and economic cycles turned south, this oversupply resulted in very poor conditions for shipping companies as rates collapsed.
Over time, supply has been reduced through ships aging out and consolidation between firms. It seems that demand is also improving. Here, we have a combination of the largest inventory restocking cycle since 2009 and massive amounts of stimulus. Inventories had been declining since 2018, but they reached multiyear lows due to the coronavirus.
Being restocked back to normal levels is a positive tailwind for trade and shipping rates. Another catalyst will be the fiscal stimulus deployed by countries, a significant portion which will go to infrastructure projects and increase consumption - both positive for global trade.
As a result, investors should consider stocks that will benefit from the sector’s bullish conditions. Three buy-rated shipping stocks with bright prospects for 2021 are Danaos Corporation (DAC), Overseas Shipholding Group (OSG), and Matson (MATX).
Overseas Shipholding Group (OSG)
OSG operates a fleet of vessels that transport crude oil and petroleum products. This industry has been a major underperformer over the last decade as North American oil imports significantly dropped with rising shale production.
OSG will do well if crude oil prices continue to rise and if shale oil production remains low as expected. The former certainly seems in play as crude oil supply looks to be pretty inelastic at least for the next 12 months while demand has been relatively resilient and could explode once the economy normalizes.
Given these factors, it’s not surprising that OSG is rated a B by the POWR Ratings which equates to a Buy. The stock has a B for Growth which is consistent with its quarterly sales growth of 30% and earnings growth of 81%. It also has a B for Value due to its very low PE of 4.7.
The POWR Ratings also assess OSG by additional categories including Quality, Stability, Sentiment, Momentum, and Industry conditions. To learn more, click here.
Danaos Corporation (DAC)
DAC has been one of the best-performing stocks in the entire market as it’s up 590% from its March 2020 low. Many of the high-flying tech stocks which outperformed in the earlier parts of this bull market have endured some bumps in 2021. However, DAC has only accelerated as it’s up 76% so far this year.
DAC owns and operates container ships all over the world. Currently, it has 63 ships. Like many shipping stocks, DAC was on a path to bankruptcy given the poor industry conditions which went from bleak to catastrophic as the coronavirus hit the world. DAC dropped 75% between the start of the year and the March 2020 low.
However, the stock and shipping rates started climbing higher. It turned out that the coronavirus had more of a negative impact on small businesses and service providers rather than goods.
The supply situation for shipping had also tightened in response to the crisis. Many expected demand to collapse, yet it remained more resilient than expected. The government’s fiscal stimulus package was also supportive of consumption. Therefore, industrial production output is only off 2% from last year’s levels, while consumer spending is actually higher.
DAC is rated a B by the POWR Ratings which translates to a Buy. The market continues to not believe in DAC so it has a PE of 6. Buying DAC is an implicit bet that global growth will continue to be strong. This seems a reasonable bet given the economy reopening in addition to the large doses of fiscal and monetary policy.
DAC has a Quality rating of B. This is borne out by its outperformance relative to the market and its peers. DAC’s price is primarily decided by shipping rates which can be quite volatile but it’s among the best to bet on rising rates.
Matson (MATX)
MATX provides ocean transportation and logistics services. It mainly ships dry and refrigerated commodities, packaged foods and beverages, automobiles, and building materials. It operates in the Pacific region, connecting places like China, California, Hawaii, Alaska, Japan, etc. Its major customers include Japanese automakers and the US military.
Given the bullish outlook on trade and industrial activity, the stock has experienced more than a 100% increase from its 2020 lows. Despite these gains, its valuation is attractive with a forward PE of 16.1 and 17% gross margins.
MATX is rated a B by the POWR Ratings which equates to a Buy. This is consistent with its strong position in a region where trade is growing. The stock had sales growth of 13% compared to the previous year, and analysts are expecting 16% sales growth next year. This is consistent with its B for Growth.
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DAC shares rose $0.65 (+1.53%) in premarket trading Thursday. Year-to-date, DAC has gained 100.65%, versus a 2.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.
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