"A BARGAIN USUALLY ISN'T"
This week we would like to evaluate shipping stocks and the famous Ferengi Rule of Acquisition No. 294 "A Bargain Usually Isn't". Currently, it seems that there is a wide gap between shipping stock prices and the stocks' assumed net asset values. We are frequently collecting and reviewing research reports from analysts and brokerage houses. Many analysts calculate and publish the net asset values of certain listed shipping companies. The method used is straightforward: Firstly, all vessels of a company are usually valued according to s&p transactions or broker reports. Secondly, the company's current net debt is deducted and the result is divided by the number of shares. It becomes a bit more tricky if the shipowner has chartered-out or chartered-in vessels on long-term contracts of more than 12 months. Also, newbuilding orders have to be taken into account.
Our 'Chart of the Week' displays the Notos Shipping Index (dark blue line) and the corresponding index level calculated at NAVs (light blue line). Both lines follow a common trend but are diverging and converging over time. The orange line displays this divergence which currently reflects a discount of 25% to NAV overall. (Please keep in mind that this discount varies across the sectors and companies.) Looking back on the last two years, it seems that discounts are indeed 'normal'. What does that mean? Either the Ferengi do not believe in the published NAVs. Or they do not care. Or there is another reason: NAVs are calculated by using highly fluctuating vessel prices. Is it correct to use these possibly inflated prices or should one rather look at the long-term replication costs of yards? Anyhow - given the current rising trends in commodity prices and meanwhile wages, we would be surprised if newbuilding prices decreased in the next 3-5 years. This should give some comfort to the Ferengi that the 25% discount really offers some intrinsic value.
Last week was particularly favorable for shipping stocks. The overall index increased by 5.5%. The bulker sector was leading with a plus of 12.8%, followed by the crude sector (+7.5%), the container sector (+5.5%), and the product sector (+5.3%), just to name the most successful ones. Our trading strategy (+6.8%) has further gained on its benchmark.
Looking ahead, we identify increasing geopolitical tensions and rising interest-rate expectations as possible downside risks. So far, the shipping stocks have done very well compared to the overall stock markets. Still, gravity applies everywhere. We have seen in the past that when all major stock markets fall, shipping stocks cannot escape this trend forever. Our maritime sentiment is still positive at a comfortable level, at least statistically showing confidence for the time being. Though, if one wants to be on the safe side, it may be a good idea to realize some profits.