COVID-era shipping stocks: The (super) good, the bad and the ugly

Amid initial fears that container lines could lose billions (the exact opposite of what happened), shares of container-ship lessors fell: Danaos (NYSE: DAC) plunged 75% from a high of $9.84 in January 2020 to a low of $2.50 two months later. It was still trading under $4 at the end of June. Dry bulk stocks also sank in the first half of 2020, albeit less than containers. Star Bulk (NYSE: SBLK) fell 67% from a high of $11.81 in January to low of $3.95 in May, then rose back to $6.60 by the end of June.

The real action in the early days of COVID came from trading tanker stocks.

As oil prices and consumption plunged, the OPEC+ production-cut agreement briefly broke down and Saudi Arabia and Russia began pumping at full bore. Crude pricing collapsed. Refineries could not shut down their product output fast enough. Oil went into steep contango (when the futures price is higher than the spot price; the opposite of backwardation) and tankers were chartered for floating storage duties, causing tanker rates to surge.

Tankers’ twin peaks

Most tanker stocks show a pattern of two peaks, one just before COVID’s onset, one after. In the fall of 2019, rates rose due to Middle East unrest and U.S. sanctions on tankers operated by Chinese shipping giant Cosco. Rates sank as China locked down and the virus spread across the global in Q1 2020. Rates jumped back up in Q2 2020 due to floating storage, then fell again.

Nordic American Tankers (NYSE: NAT), a darling among retail traders, went from a low of $2.30 on March 23 to a high of $7.25 on April 27, more than tripling in just over a month. Other tanker stocks rose on floating storage as well, but not as much as NAT.

Chappell believes NAT briefly outperformed other tanker stocks because institutional investors, who were not invested in NAT, were “fading” (taking the opposite position on a high-momentum move) the other names.

“First, there was a big institutional short-term [buying] spike in early March into April, but by the time you got to late April, that’s when the institutions started fading and that’s when the retail guys started chasing it. The institutional guys knew it was anomalous, they knew the contango curve would eventually shift to backwardation, whereas the retail guys were getting hit over the head with these record earnings and promotional press releases and appearances on CNBC.”

Tanker bullishness quickly evaporated as the “hangover” phase came into focus: All of the crude and product cargoes in floating and land-based storage would take a very long time to unwind, and until they did, tanker transport demand would suffer.

Shares of product-carrier owner Scorpio Tankers (NYSE: STNG) hit a low of $12.35 in March 2020 amid initial COVID panic, surged to $28.21 in April amid the storage-play euphoria, then collapsed back to $12.50 by the end of June.

Containers, dry bulk begin ascent

The second half of 2020 saw shipping stock sentiment rebound, first for containers, then tankers, then dry bulk. As it turned out, stock pickers bet right on containers and dry bulk and wrong on tankers.

Container spot freight rates began their epic climb in June 2020 — and just kept rising. Rates today remain near all-time highs.

Container-ship leasing stocks were slow to react. All the way back on Aug. 16, 2020, Stifel analyst Ben Nolan wrote, “The single most compelling investment opportunity in the traditional shipping segments are the container-ship leasing companies,” calling these stocks a “classic catch-up opportunity.” J Mintzmyer of Seeking Alpha’s Value Investor’s Edge was another early proponent of container shipping stocks.

Container-ship leasing stocks finally began to move in September-October 2020 and kept rising until just a few months ago. Danaos ultimately went from that low of $2.50 in March 2020 to a high of $89.41 in September 2021 — an astonishing 35x increase.

Most crude and product tanker stocks hit bottom in October 2020, then gravitated upward until summer 2021. (Nordic American Tankers was an exception; its stock trend has been especially ugly, falling continually since last April. On Monday, NAT — which has been public since 1995 — flirted with a 26-year low.)

Why did most tankers stocks partially rebound so early when spot rates have still not recovered over a year later?

Giveans said: “It was really about an expectation of a recovery before the delta variant. People were saying 2020 is the bottom, 2021 is going to be better. I also don’t think people baked in the amount of inventory that had to be destocked and they were certainly more optimistic on the degree and timing of the demand recovery than what came to fruition.”

Chappell said, “I think it was partially ‘It can’t get any worse.’ Obviously, it turned out to be quite early.”

Dry bulk stocks started their move just after that, in late 2020. These stocks moved prior to rates rising, unlike container stocks, which initially lagged rate rises.

Dry bulk spot rates didn’t start their surge until Q1 2021. Giveans explained: “Starting in October and November [2020], sentiment shifted and people started to say, ‘OK, there’s still going to be a lot of spending. It’s really about production. Iron-ore production is going up. Coal demand is going up in the near term. The grain trade is very robust. Dry bulk is a GDP business. GDP growth next year will be up so dry bulk growth will be substantial.”

Q1-Q3 2021: Great for containers, dry bulk

This year, dry bulk carrier owners have enjoyed the best rates since before the financial crisis, container shipping rates have completely blown away all historical precedents, and in the other direction, tanker rates have been the worst in three decades.

The first three quarters of this year were exceptionally good for dry bulk stocks and container stocks and surprisingly benign for crude and product tanker stocks.

Some dry bulk stocks have done even better than container stocks in 2021. Between the beginning of this year and early October, shares of Star Bulk almost tripled. Between January and early September, shares of Golden Ocean (NASDAQ: GOGL) more than doubled.

Container, dry bulk and tanker shares all suffered a hiccup in July due to the delta variant. Stocks began climbing again thereafter, but only briefly. Most shipping stocks peaked in September or October and have pulled back since then.

What’s next for container stocks?

Container shipping stocks, for both ship lessors and liner companies, seemed to have retrenched at the same time container freight rates and charter rates peaked and moderately retreated.

“Are we at the peak [for containers] or close to it? Probably,” said Giveans. “But I don’t see a sharp pullback to pre-COVID levels by any stretch of the imagination, whereas a lot of people do fear that and are pricing that in.

“I don’t think container equities will track rates as much on the way down as they did on the way up,” Giveans added, noting that ship-leasing companies have revenues locked in via leases of up to four years in duration, so charter rate declines “are not as impactful.”

One reason for stock-trader wariness: Some may view potential moves in container charter and freight rates similarly to how rates move in other shipping segments that are far more volatile, such as very large crude carriers (VLCCs; tankers that carry 2 million barrels) and Capesizes (bulkers with capacity of around 180,000 deadweight tons).

“We’ve seen VLCCs go from $20,000 [per day] to $200,000 to $2,000 in a year and a half and Capes go from $3,000 to $30,000 to $80,000 and back to $30,000. That’s extreme volatility,” said Giveans. “The container-ship charter side is much less volatile. It is the only sector to ever go up for 72 weeks in a row. That has never happened before.”

There’s also a psychological barrier due to extreme gains visualized in container stock charts, i.e., the belief that a stock has already risen so much that it can’t keep going. For example, shares of Zim (NYSE: ZIM) fell as low as $11.34 in late January on their first day of trading, and were as high as $62.20 in mid-September — quintupling in less than eight months.

“There is a psychological headwind there. That chart is certainly intimidating,” Giveans said, referring to a stock chart of Danaos, which is up 1,800% since mid-2020.

“But if you look at Danaos today on a P/E [price-to-earnings] or EV-EBITDA [enterprise value-to-earnings before interest, taxes, depreciation and amortization] or even NAV [net asset value] basis, it’s still very cheap. If you look at the chart and see it went from $3 to $70, you think, ‘I must have missed it,’ but it should never have gotten down to $3.”

What’s next for dry bulk stocks?

Dry bulk rates are expected to fall seasonally into the fourth and first quarters. As of Monday, rates were still far above the five-year average. But they peaked in early October, when Capesize rates topped $80,000 per day, and as soon as rates reversed, most dry bulk shares started falling. As in the container sector, equities appear to be following rates down.

Chappell said, “With dry bulk and containers, it is the opposite of tankers.” Tanker stocks are being driven by the “it can’t get worse sentiment,” whereas Chappell said dry bulk and container stock sentiment is more “this is about as good as it gets.”

The thinking on dry bulk and containers, Chappell said, is that “all of the congestion-related issues [are] anomalous, a function of elevated demand and limited spending on services and supply chain bottlenecks and that ‘at some point those are going to normalize and return to 2019 levels so we need to start taking profits.’”

In general, Chappell believes equity buyers have become much quicker to sell shipping stocks when rates fall and slower to buy them when they rise. “The market is supposed to be forward-looking: two to three quarters in advance of the inflection point. And I am seeing that in my other coverage areas now. In rail and trucking, people are positioning for what they see two to three quarters in advance.

“But in shipping now, for many reasons — [low] market caps, retail [traders], past poor corporate governance — people want to see the whites of the eyes of a recovery to make sure it’s real before they get involved. And they certainly don’t want to see the whites of the eyes of a downturn as it unfolds. So, the cycles are much shorter.

“You saw it in dry bulk when the Capesizes went from $80,000 to $70,000 a day; $70,000 is still an amazing Cape rate and the stocks started declining,” said Chappell.

According to Giveans, dry bulk stock sentiment is “really about rate of change” for dry bulk rates. “It’s pretty clear that rates in the first quarter of 2022 are going to be lower than in the fourth quarter. No one’s questioning that. But I would say it’s going from incredible rates to very good rates, and it still will be very profitable.”

Giveans also believes that dry bulk has “the best supply-demand picture” of any shipping segment in 2022. “It’s hard to see a situation where demand doesn’t outpace supply,” he maintained.

What’s next for tanker stocks?

For tanker equities, “it’s the exact opposite of dry bulk,” explained Giveans. “It is also about rate of change of spot rates,“ but in the case of tankers, the thinking is that “rates are going to be better next year,” even though “they’re still not going to be above cash breakeven in the first quarter.”

“Do I think tanker rates are going to be incredible next year? No. Will they be much better than in 2021? Of course. This has been literally the worst year in decades.”

Chappell said, “I’m optimistic tankers are finally going to get to that recovery, but to put it in perspective, if you look at the VLCC rate estimates for next year, I’d be shocked if I’m not in the bottom quartile, if not the bottom decile, if not the low [estimate]. I’m still conservative relative to most people out there, but it’s about the rate of change. VLCC rates don’t need to get to $50,000 a day. If they go from an average of $4,000 this year to $16,000 next year and end in the fourth quarter with a seasonal upturn in the 20s, that’s ringing the bell. We’re on our way to a recovery.

“It doesn’t need to be this grandiose dry bulk or container shipping replica. It just needs to show that we’re out of the trough. And I’m confident that’s going to happen. The thing I watch most is inventories. As long as inventories continue to draw, it’s just coiling the spring even tighter and there’s going to have to be a supply response at some point.”

In the meantime, tanker stocks have pulled back since October, and the omicron variant has just created yet another headwind.

“The playbook used to be that even in bad years, the fourth quarter was better than the second and the third, and in good years, it was substantially better, so after Labor Day you started buying tanker stocks in anticipation that rates were going to start to go up,” said Chappell.

“But I think that by the time we got to this October, people realized that not only are we not entering a seasonal increase, but the third-quarter numbers are going to be really gross and — with the quarter-to-date update in earnings season — we’re not even going to get a good fourth quarter.”

Another way to look at the recent tanker-stock pullback: The stock buyers, largely retail traders, may have been more forward-looking than traders of container and dry bulk stocks. Or rather, forward “hoping,” as they bought shares in anticipation of the still-elusive rate recovery. Consequently, unlike container and dry bulk stocks, tanker shares have not followed freight rates. And from time to time, such as in July and since October, tanker stock traders realized they were too early and tanker equities retreated.

Giveans believes the recent decline in tanker stock prices is due to a too-steep rise immediately prior to that. “You get these sentiment shifts where you get these runups, then there’s a pullback where people think, ‘Oh wait, we got a little bit ahead of ourselves. The market isn’t improving.’ Euronav [NYSE: EURN] ran up from $8.50 [mid-September] to $11 [third week of October], clearly prematurely.

“The September-October rally [for tankers] was so ridiculously strong that it had to come off those levels,” he said.

What happens next is highly dependent on COVID, said Giveans. “It’s all about omicron and whatever the next variant is. Tankers probably have the most exposure to COVID of any shipping segment — good or bad.”

Click for more articles by Greg Miller 

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