Shipping rally and equity correction candidate list
Head of Equity Strategy
Summary: Shipping stocks are enjoying tailwind from the pandemic that has lifted shipping rates and profitability. Our view is that the current dynamics will continue in 2021 and thus shipping stocks could continue to perform well, but longer term we prefer more broad-based logistics companies. In today's equity update we also take a look at US momentum stocks and highlights an inspirational list of stocks that could be hit hard if we get an equity market correction in the near future.
This week the world’s largest container shipping company reported Q4 earnings showing a solid tailwind from the pandemic with revenue up 16% y/y reaching $11.3bn and 84% y/y increase in EBITDA reaching $.2.7bn. This translate into a healthy operating margin increase from 15.3% to 24.1% in just one year. This is part of the overall trend of rising costs everywhere in the global supply chain with UPS reporting 8% increase in average revenue per piece in their Q4. A global composite container freight index is running at levels 3x higher than normal at this time of the year.
Despite strong tailwind from the pandemic lifting shipping stocks in general with the Bloomberg Global Marine Shipping Index up 81% since March 2020, the industry is only up 19% or 1.1% annualized since late 2005. The industry has been plagued by oversupply, something that has plagued the entire commodity sector since 2010. The big question is whether we have entered a new secular trend in shipping stocks with more gains in front of us? Our view is that stimulus and inflationary pressures building everywhere will continue to support shipping rates this year and combining that with the momentum factor being positive (shipping stocks have outperformed global equities the past year), we are optimistic on shipping stocks on a tactical level in 2021. Longer term, we have not moved to a positive position and like the broader logistics companies more as we highlighted in our Are logistics companies long-term winners? from December 2020.
For those investors that want exposure to shipping stocks the list below is a good starting place. It shows all the shipping stocks in the Bloomberg Global Marine Shipping Index that can be traded on Saxo’s trading systems. We have included the consensus price target from analysts covering the stocks and calculated the spread in percentage to the current price. Analysts are quite positive on the industry with an average price target 21% above current market prices.
|Name||Price||Price target||Mkt. cap. USD mn.||Price vs. price target (%)|
|AP Moller - Maersk A/S||2,085.80||2,503.06||39,216||20.0|
|COSCO SHIPPING Holdings Co Ltd||0.99||1.37||18,876||38.4|
|Orient Overseas International Ltd||9.65||14.67||6,152||52.0|
|China Merchants Energy Shipping Co Ltd||0.72||1.17||4,863||61.9|
|Nippon Yusen KK||28.02||30.64||4,767||9.4|
|COSCO SHIP ENGY||0.41||0.58||3,838||43.3|
|COSCO SHIPPING Development Co Ltd||0.16||3,622||NA|
|Mitsui OSK Lines Ltd||29.46||39.31||3,555||33.4|
|Wan Hai Lines Ltd||1.51||1.80||3,343||19.7|
|Kawasaki Kisen Kaisha Ltd||18.45||17.47||1,734||-5.3|
|Star Bulk Carriers Corp||11.82||13.92||1,135||17.8|
|DHT Holdings Inc||6.00||6.55||1,025||9.2|
|Pacific Basin Shipping Ltd||0.19||0.22||908||13.3|
|Scorpio Tankers Inc||15.48||19.35||898||25.0|
|SFL Corp Ltd||7.33||7.20||886||-1.8|
|Golden Ocean Group Ltd||5.47||789||NA|
|D/S Norden A/S||18.82||20.63||754||9.6|
|Navigator Holdings Ltd||9.73||13.40||544||37.7|
|Nordic American Tankers Ltd||3.26||3.49||493||6.9|
|FLEX LNG Ltd||8.64||12.34||471||42.8|
|Diana Shipping Inc||2.92||3.26||261||11.6|
|Tsakos Energy Navigation Ltd||9.22||10.50||173||13.9|
|Ardmore Shipping Corp||3.90||5.12||130||31.3|
Source: Bloomberg and Saxo Group
Is a new momentum crash on the horizon?
Equities are grinding higher everyday and the speculative fever is running high with Bitcoin price action and the short squeeze in GameStop and other shorted stocks as recent evidence. If we look at the Russell 3000 Index in the US, we observe 720 stocks with a one-year total return above 50%. Yes, you read correctly and note that the starting point for the calculation is before the major selloff started. In the finance literature, many different authors have covered a concept called momentum crashes (read here, here, and here). Momentum crashes mean different things to different investors. The ones that implement equity factor strategies in long-short versions tend to view momentum crashes when the equity market bounces back from a huge selloff as the one in 2008 when the losing stocks shorted suddenly reverses big time creating large losses in the short component of the portfolio relative to the gains on the long component.
In a paper from the quant investment firm Robeco it is shown how generic momentum stocks (sorted on simple 1-year total return metric) suffered greatly in the subsequent 36 months. Long-only momentum strategies are part of an overreaction and buying on narratives aggravating the mispricing which drastically lowers the expected returns (they become negative) on such stocks and is realised when the market reverses. The recnt erratic behaviour in financial markets and equity valuations getting inflated across what we call tier-2 and tier-3 companies (those with little earnings) are a cause for concern. We could very well soon be experiencing a momentum crash in combination with a normal and healthy equity market correction. In this case the inspirational list below shows the stocks in Russell 3000 that are up the most the past year.
|Name||Return 1Y||Return 5Y||Market Cap (USD mn.)||P/E||Return YTD|
|Plug Power Inc||1368.72||3883.28||32326.95||89.71|
|Digital Turbine Inc||1275.39||7304.17||7944.40||211.79||57.09|
|FuelCell Energy Inc||1187.38||-53.77||8550.38||137.42|
|eXp World Holdings Inc||1124.98||18836.11||9537.27||426.06||116.00|
|Workhorse Group Inc||1101.87||669.20||4635.55||94.44|
|Waitr Holdings Inc||1078.42||434.00||40.65|
|Retractable Technologies Inc||1019.48||513.52||583.00||53.52||60.52|
|Aspira Women's Health Inc||1018.32||644.92||972.71||31.00|
|Pacific Biosciences of California Inc||992.86||422.78||8538.90||97.69||76.95|
|Celsius Holdings Inc||940.51||3172.58||4414.13||957.06||20.99|
|Fulgent Genetics Inc||924.17||4186.46||84.89||231.04|
|Silvergate Capital Corp||791.83||3349.34||108.97||93.82|
|Clean Energy Fuels Corp||602.90||642.98||3358.70||167.27||115.52|
|Seres Therapeutics Inc||600.82||11.12||2353.29||5.27|
|Arcturus Therapeutics Holdings Inc||557.70||120.85||2086.75||86.03|
|Tupperware Brands Corp||531.14||-7.80||1744.24||19.09||9.51|
Source: Bloomberg and Saxo Group
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.