The Cabot folks have apparently taken a liking to the “double your money this year” promise as their version of a “money back guarantee” — no, they don’t make up the difference, but they promise you a refund if the pick doesn’t double. A better deal than most newsletters as far as refund policy goes … but still, it’s your money, what do they have to lose by promising to give it back to you? (Especially if they know you probably won’t really insist on the stock doubling, and probably won’t ask for a refund as long as you think the letter is reasonable).
But anyway, “Double Your Money” is what they pitched with the teaser for LDK Solar back in February, and so when they issued another teaser that was headlined “Double Your Money in 2011 Guaranteed” … well, I almost didn’t read it. I just assumed they were still guaranteeing a double in LDK … which, at this point, would be easier to achieve than it was in February (the stock is down about 10% from when they teased it).
But no, this time, as their April “Stock of the Month” (the teaser is for the Cabot Stock of the Month newsletter, which picks from among Cabot’s dozen or so letters for an idea each month), the “double” that’s promised is in ocean shipping — you can go back and check out their promise of a double in LDK Solar here if you like, but if you want to know about the new promise, well, let’s just get to it …
Last time they promised this kind of huge gain it was by saying that they had a big gainer that could be the next First Solar (FSLR) … which kind of made sense, given that both companies are in the solar business.
This time? The promise sounds familiar …
“Here at Cabot Stock of the Month, we’ve just targeted another big doubler that’s beginning to look a lot like First Solar, which landed us a 321% gain….
“Like First Solar, this company is also riding the wave of profit growth—but only in a little-known but highly lucrative sector: Ocean shipping.”
I don’t know about that “little known” bit — investors have certainly had love affairs with shipping companies before, particularly during the China-led boom of a few years ago when the dry bulk tankers and oil tankers were earning crazy money and pushing out massive yields to shareholders. Until the demand dropped, being massively indebted suddenly became a bad thing, and most of ’em had to sell boats and cut dividends. But yes, they’re certainly more “little-known” now than they were in 2007.
The Cabot folks are generally known for being growth-stock aficionados, looking for stocks that have strong technical growth indicators, which often means that they look expensive by conventional valuation metrics like the PE ratio. That’s not always the case, of course — LDK had a boom late last year and is now priced at a forward PE of about 4, which is certainly not expensive, but the stock still fell 10% after the earnings came out because the company didn’t project yet more massive revenue growth. So yes, apparently it is possible to have a forward PE in the mid-single-digits and yet be “priced for growth” in the minds of some investors.
So which ocean shipping stock are they teasing over at Cabot?
“Most investors don’t realize this, but ocean shipping is the blood supply of global growth. You see without ocean shipping, my friend, there would be no global trade.
“There would be no way to get copper from Brazil to China, or U.S. wheat to Russia, or Chinese steel, or Japanese cars, or China-built computers back to the U.S.
“With demand for ocean shipping soaring on the heels of the global recovery—especially in and out of China—there simply aren’t enough ships to handle the increased demand.
“That’s what makes my April Stock of the Month, a Chinese container shipping company, such a great play with 58 ships on long-term leases and 11 more ships to be delivered next year—all of which are committed to 12-year leases at today’s high rates.”
Huh … a container shipping company, not what I was expecting — after all, copper, wheat, steel and cars aren’t moving in containers (for the most part), though those “China-built computers” are. I was thinking we’d see a tease for dry bulk shipping, which got most of the attention last time around and is the cleanest play on Chinese demand for raw commodities from abroad, shiploads of iron ore, coal, and wheat (remember when even the folks at CNBC where talking about the Baltic Dry Index?)
So what other clues do we get about this container company?
“… stock price has risen 175% since July 2009 …
“… what I like best about this company is the fact that it is NOT a major player—but a small one with shrewd management and a long-track record of richly rewarding investors with stock profits and dividends….
“JP Morgan, Morgan Stanley and Bank of America, along with 17 other mutual funds and institutions, together own millions of shares….”
And, as you can imagine, they see demand growing … in their words, “there simply aren’t enough ships to handle China’s increasing shipping demand.”
The numbers have apparently been good, too:
“… you couldn’t ask for a better time to buy it either, as short-sighted investors took profits on the heels of last quarter’s 50% revenue and 79% earnings growth.
“However, in the days since then, the stock has not only broken out of its 50-day moving average, but is now building an even stronger base.”
They’re expecting to see the stock 30-50% higher by June (which is only two months away now) … so who is it?
Well, toss that info into our Mighty, Mighty Thinkolator and we learn that this is … Seaspan (SSW)
Which is a stock that won’t be a stranger to Gumshoe veterans — it was a hot pick by several international, China, and dividend enthusiast newsletters a few years back, before the bad times hit in late 2008. They do indeed have 58 container ships, with more on order (they just got the 58th one from the shipyard last month), and they have generally been considered pretty conservative — they do carry huge amounts of debt, like virtually all shippers, but they don’t order ships unless they have a long-term contract in place for that ship.
Seaspan is a popular name for maritime companies, by the way — to avoid confusion, you can find Seaspan Corp’s investor relations page here. Their financials are often confusing because they’ve always carried a lot of debt, they have also sold preferred stock with pretty high dividends (including a new issue this year), and have wildly varying net income numbers over the years, along with free cash flow that’s typically negative because of the high capital costs of building their fleet.
Last year, despite a huge revenue increase, they booked a loss of about $1.70 per share, though they still paid out a dividend (trailing dividend rate is 50 cents/year, though that was after boosting it 25% in the middle of 2010 and they expect to boost it by 50% at some point this year as well — so if it hits 75 cents as expected, that would be an annual yield of just under 4% at roughly $20 per share, getting close to where it was when the dividend approached $2 per year and the shares were in the $30s before the financial crisis). This year, the expectation is that they will book a profit of about $1.50 per share on revenue that’s estimated to climb another 35-40%, so they are certainly in a nice recovery mode at the moment.
And yes, though the shares did dip down to close to the 50-day moving average last month when they released earnings, that didn’t last long — the shares are up about 20% since then, though they’re down about 6% today after that big run (profit taking? Dunno).
So how do you feel about shipping? Ready to jump into the containers again? Back when we last looked at Seaspan a couple years ago there weren’t many options for investing in container shipping in the US stock markets, but now there are quite a few. Most of these are effectively long-term leasing companies (like SSW) who carry heavy debt and lease out massive ships to companies like Maersk, COSCO, and the other giants of global container shipping, and therefore allow those big shippers to not have to carry massive ship ownership costs on their books. A few competitors: Costamare (CMRE) is significantly cheaper and higher-yielding, though it also has a significantly older fleet; Global Ship Lease (GSL), which is much smaller (don’t know anything about them); Diana Containerships (DCIX), which was spun off from parent Diana shipping last year and is really a startup at this point; Box Ships, which is being spun off and IPO’d by Paragon Shipping sometime soon and will probably have the ticker TEU; Danaos (DAC) … and I’m probably forgetting some. There are also several stocks in this vein that are significantly harder to trade, like Rickers or First Ship Lease Trust in Singapore, and you can also go down the ladder to the owners of the actual containers, stocks like CAI International (CAP) and TAL International (TAL) or Cronos Group (which I think delisted and disappeared as a public company a few years ago, but which appears to still have one publicly traded partnership on the pink sheets at XXCGB).
I don’t know if any of those stocks will perform well, and they’ll probably all continue to ride the same boom/bust wave that seems to hit all high-debt shipping sectors, but SSW is probably the class of the bunch in terms of age and size of fleet and long-term contracts with the big Chinese container shippers, and it’s among the biggest pure plays on owning container ships.
As to whether it’ll double … well, I didn’t charge you for this information so I guess I can promise you your money back too, but I’d be surprised to see SSW hit $40 this year if, as I expect, the share price after this recovery reverts to being driven by the dividend yield. A yield of 3%+ is great, especially when it’s growing as fast as SSW’s has over the past two years, but I think investors who are mindful of the sharp swings in shipping stocks will probably be suspicious about whether the dividend can continue to grow at 25-50% per year.
Of course, you can still have a mighty fine stock and great returns even if it doesn’t double — and even more importantly, I’m often wrong. So what do you think? Interested in SSW, or in any of the other container shipping companies? Think we’ll hit overcapacity again in the near future, or see these stocks get shellacked by debt fears or rising interest rates? Or is global trade so strong that demand will continue to pace supply? Let us know what you think with a comment below.