Shipping stocks ready for strong returns in 2022
Excellent risk / reward configuration in 2022
A tough 2020 turned into a phenomenal return for shipping in 2021. Although I expected a strong year according to last year’s introductory article, and the average sector provided a yield of + 62%, our Model Investor-Proof portfolios achieved a yield of 136.2% with long-only positioning without leverage or options.
Let’s be clear up front: I don’t expect another 136% return in 2022. Such a return, essentially a decade of performance in one year, might never happen again in my lifetime. However, the risk / reward configuration until 2022 appears to be the best on record and even better than at the start of 2021. Indeed, while the upside is likely to be a bit smaller, the downside risks have also been great. part mitigated. The financial strength of an average listed shipping company (i.e. balance sheet leverage, liquidity, cash flow) has never been stronger, corporate governance n t has never been better and the majority of the companies we cover have attractive return-to-shareholder policies. For container ship companies in particular, most of these companies have signed strong contracts for 3-5 years, guaranteeing solid results for years to come, even as forward market rates recede. The dry bulk and tanker segments remain much more speculative, but here again, the balance sheets are solid and the management teams are solid. This is arguably the best risk / reward setup we’ve ever seen in the expedition.
Market review in 2021
The shipping industry itself has performed very well in 2021, posting an average return of 62.4% year-to-date, calculated on Value Investor’s Edge (based on the average of over 50 maritime stocks listed in the US and Oslo since there is no consistent ETF in the industry). Our models outperformed significantly, with a return in 2021 of 190.8% in the speculative model and 81.7% in the value model (best risk / reward).
It was a record year for these investments and it is the 6th consecutive year of industry outperformance. Our six-year history is shown below, which includes 3 years of tracked transactions (2016-2018) before a shift to easier-to-follow model portfolios from 2019-2021.
The most interesting part of the composition graph is that the average ‘shipping industry’ (SEA ETF of 2016-2018; custom index of 2019-2021 after the dissolution of SEA) produced a return of 0% over the course of for the past six years.
If you have heard or thought that “shipping is a bad place to invest” it has indeed been true for much of the past decade. Much of this is because “shipping” is actually many sub-segments, all of which have different fundamentals and business models. This is an area where industrial research and company specific due diligence is extremely important.
While almost anyone could have made a decent money from shipping in 2021, it remains clear that stock selection is very important as our models more than doubled industry averages and outperformed the S&P. 500 of 4.7 times.
The best choices for 2022
In today’s update, I’ll cover 3 of my top picks for 2022, which include a popular trade favorite, a 2022 payback game, and an overall risk / reward setup. These 3 choices are included in the 12 stocks of our 2022 Model Portfolios at Value Investor’s Edge, which will be dynamically updated throughout the year.
Trade Favorite: ZIM Integrated Shipping (ZIM)
ZIM Integrated Shipping has been a favorite pick over the past year as I started buying immediately after their IPO in late Jan 2021 from $ 11 to $ 14 / sh before I shared a research report on Seeking Alpha early. February. Initially, I was looking for a range of $ 20 to $ 30 by mid-2021, but that was before the freight rate hike boom that occurred after May, as shown in the graph on one year below:
Source: Freightos FBX index, one-year chart
ZIM is expected to report EPS of $ 30 / sh for 2021 only, and based on current rate levels, it looks likely 2022 could exceed that performance. ZIM has already returned $ 4.50 in dividends and is expected to pay an annual dividend of $ 10-14 over the next two months (based on 30-50% of FY21 earnings).
The stock price remained depressed due to a mix of pre-IPO surpluses from big sellers as well as a general misunderstanding or company skepticism. Understandably, many investors believed that containerized freight markets would be booming and collapsing in the near term, so ZIM rarely receives any credit for the potential for profits over time. I estimate they currently have around $ 30- $ 35 / sh in cash on the balance sheet and generate up to $ 1.50 / sh in free cash flow per week at the rates in force. In addition, ZIM has no traditional debt and its only significant future obligations are vessel rental expenses.
I provided a full update in early December which included more details on the economy and expectations and included the snapshot which shows my near term expectations for ZIM versus analysts’ expectations.
The graph above was my estimate as of November 30th. I now expect EPS of $ 13.00 to $ 14.50 for Q4-21 ($ 13.75 in the middle), $ 10.00 to $ 14.00 for Q1-22 ($ 12.00 middle) and $ 7.00 to $ 10.00 (middle $ 8.50) for T2-22.
My current “fair value estimate” for ZIM is $ 77.50, for about 37% increase. This is an exceptionally conservative estimate, which only includes expectations of excess earnings through Q2-2022. If freight markets remain strong through 2022, then ZIM could easily be a triple-digit stock by mid to late summer.
Recovery game for 2022: International Seaways (INSW)
The main recovery stake for 2022 is International Seaways, which is an oil tanker and petroleum products company with a fleet of 86 vessels. Although oil companies have suffered from gloomy market conditions for most of the past two years due to disruptions in oil demand linked to COVID-19, we are now near a recovery scenario. Once global jet travel returns to 2018-19 levels and OPEC resumes full exports, we should return to healthy rates as the global fleet is otherwise in good balance. While timelines may change and Omicron has likely postponed the recovery for a few more months, current expectations are that the market will recover by the third quarter of 2022.
INSW is particularly attractive because it has a strong balance sheet and corporate governance, and it trades at one of the largest discounts to net asset value (“NAV”) in the industry. INSW is also actively buying back stocks, which creates value by exploiting the tradeoff between cheap stocks and higher value assets. In addition, INSW has a huge liquidity catalyst of $ 100-150 million to come by mid-2022 as they are ready to sell or refinance their FSO joint venture. Once this refinancing is complete, I would expect the INSW to supercharge its buybacks if these huge valuations persist.
While we don’t have a specific timeline for the recovery of the oil tanker market yet, this is the kind of position that could double or more in a bull market scenario, but comes with minimal downside even though 2022 is a bleak year. . In fact, it is possible that the INSW is still trading around $ 20 / sh or more, even though the tankers have a bad year overall in 2022. This is the kind of risk / reward setup that we appreciate and have been. our “secret” to success all these years.
My current “fair value estimate” is $ 26.00, for about 68% of the expected increase.
Global risk / reward choice: Textainer Group (TGH)
My top overall risk / reward choice is Textainer Group, which is a crate rental company, which focuses on financing container lines to renew and expand their 20 ‘and 40’ crate fleet (as shown below ).
Image Credit: Textainer Group
These boxes typically have a useful life of around 15 years and typical rental terms were normally 4-7 years. That would mean companies like TGH would earn a decent return on the first contract, but they would have to accept mid-life returns and attempt to place them on new contracts. The exceptional strength of the market from late 2020 through 2021 meant that canisters were very scarce and liners were ready to sign contracts of up to 12-14 years at record rates.
This completely transformed Textainer’s business model, both increasing the expected ROE of all of its capital expenditures as well as significantly reducing the tail risk of the contract from 2025-2030+. All of TGH’s recent growth will be based on these exceptional contracts until the 2030s!
Despite this complete transformation of TGH’s business model and its balance sheet over the past few years, the stock has not yet budged significantly. I think TGH should raise to a current “estimate of fair value” of $ 55, for an increase of about 47%. This company deserves our Best Risk / Reward Pick designation due to the exceptionally stable nature of cash flow. Even if market rates correct downward in the next year or two, much of TGH’s highest margin cash flows are fixed until the 2030s.
Summary: The risk / reward ratio is excellent in 2022
As outlined in the recap notes and top picks, I think 2022 offers the best risk / reward setup we’ve ever seen in shipping. While I doubt we will see a repeat of the life-changing 136% + type returns, there is arguably less risk this time around with the potential to generate even very high double-digit annual returns.
I shared three of my best ideas for 2022: International Seaways, Textainer Group, and ZIM Integrated Shipping. Our own model portfolios include 12 top picks that will be regularly updated and dynamically rebalanced throughout the year.
I hope these updates have been very helpful to readers. How was your experience in 2021? What are you looking for in 2022? I look forward to your views and contributions in the comments section!