21-11-2020 A ‘rotation’ is underway, and the turn favours shipping stocks at last, By Joe Brady, TradeWinds
Is the “rotation” finally moving in shipping’s direction? An investor rediscovery of growth or “value” stocks helped shipping outpace the broader US stock market indices for a second straight week, and could be a preview of things to come in 2021, says investment bank Jefferies. This sort of rotation by stock buyers away from tech names and listings that were boosted by Covid-19 lockdowns has been in effect for at least the past two weeks, according to Jefferies lead shipping analyst Randy Giveans. The 30 shipping stocks under Giveans’ coverage were up an average 7% on the week at Friday’s close of trading in New York, outpacing the Dow Jones Industrial Average, the S&P 500 and the Russell 2000 for the second straight week. The S&P 500 was down 0.8% on the week while the Russell had gained about 2.3% over the five days.
Containerships and LNG led the way with 9% average gains, followed by dry bulk at 8%, tankers at 6% and LPG at 4%. Only four of the 26 stocks lost ground. This comes after the maritime group jumped 9.2% in the week ending 13 November, outpacing a strong 6% gain by the Russell and 2.2% climb by the S&P 500. Meanwhile, Jefferies data shows daily trading volume for shipping stocks measured in dollars increased an average 51% from one month ago, to an average of $5.9m per day from $3.9m.
Most experts point to 9 November as the day the shift toward growth stocks began in earnest, as Pfizer announced the overwhelming effectiveness of its Covid-19 vaccine in human trials. A market surge that day marked the biggest flow into value stocks since 2008, according to data from JP Morgan. “There’s certainly been a shift into cyclical, energy related stocks, but also a more general shift into small-cap stocks,” Giveans said in an interview Friday. “Our small-cap specialist at Jefferies has been harping on this big shift into value and small caps, and away from tech mega-names that had been driving the S&P.”
Even though there also has been some wobble in the broader market’s rally on escalating shutdowns in the US and across Europe as the virus surges, it’s been balanced by a series of positive vaccine-related announcements. “Every time you see a vaccine announcement there’s a big uplift in the commodity-driven names. If there is a vaccine, people will get more comfortable flying, driving, travelling and inventories will start to get drawn down,” Giveans said. “Shipping will benefit from that.” Because the sector has an orderbook over the next 18 to 24 months that is near historically low levels, any improvement in demand will benefit shipping, he said. “You pretty much know what your supply is going to be for the next 18 months. So even with a demand rebound starting in summer 2021, you should have a solid year if not more of good rate levels,” Giveans said.
Any relief is welcome for an industry that has performed much worse than the broader market in 2020. Only two of the stocks in the Jefferies index have gained ground year to date, with containership owners Danaos Corp up 62% and LNG’s Dynagas surging 23%. Danaos once again led the pack in the past five days with a 31% gain through Friday morning in New York. The share has been a Giveans favourite based on its willingness to repurchase stock, splashing out $31.1m for 4.4m shares that constitute 17.5% of its overall float. Danaos also has benefited from the unexpectedly strong recovery in boxship rates. With many shipping stocks trading at barely 50% of their net asset values, Giveans has been an advocate of share buybacks like the one Danaos executed.
Still, some owners like Scorpio Tankers and Star Bulk have stressed the security of cash on their balance sheets as long as the Covid-19 shadow lingers. “We’re trying to put a strong wall behind our back here,” said Scorpio president Robert Bugbee. Or as Star Bulk president Hamish Norton put it, “The last I looked, we had a pandemic.” Even if owners expect their shares to rise organically from investors newly friendly to a sector, there’s still an argument to use buybacks now, Giveans contended. “If you think your stock is going to be up 30% in three months, wouldn’t you want to buy back shares now?” Giveans asked.
As TradeWinds has reported, boutique investment bank HC Wainwright has entered shipping in recent weeks with the hire of Magnus Fyhr, the veteran shipping analyst who once did his research at Jefferies. Fyhr said the bank recognised a countercyclical play, as did his boss, HC Wainwright chief executive Mark Viklund. “HCW has had success taking a contrarian view of certain sectors, looking to build out while competitors are retrenching. We believe that the maritime sector is at that point and that we have the opportunity to create one of the leading franchises,” Viklund said in a message to TradeWinds.