Opinion: This contrarian stock play is leading to big gains, and the party isn’t close to being over

Published: Jan 11, 2020 3:14 p.m. ET

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David Marcus of Evermore Global Advisors explains the marine-shipping industry’s transition

Bloomberg
Marine-shipping stocks greatly outperformed the broader U.S. market in the second half of 2019, as the industry geared up for new global limits on sulfur-fuel emissions.
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In August, investor David Marcus made a prescient call, saying shares of marine-shipping companies would soar as the industry prepared for new fuel-emission standards that would go into effect Jan. 2, 2020.

Marcus is the CEO of Evermore Global Advisors in Summit, N.J. In an Aug. 7 interview7073彩票注册 with MarketWatch, he described an unusual scenario: Following several years of painful declines in shippers’ stock prices, as newly ordered ships arrived in time for China’s economic growth to slow and shipping volumes to decline, the industry was poised for a reversal.

New global sulfur-emission standards, known as IMO 20207073彩票注册, were scheduled to hit on the first business day of the new year. This meant companies had to modify ships to be able to use the new fuel or install scrubbers for their emissions to comply with the new standards. And if a ship was too old to make modification cost-effective, it would be headed to the scrap yard.

7073彩票注册All of that meant an expected decline in supply, and an increase in day-rates, profit and cash flow for shippers — and investors.

7073彩票注册During a follow-up interview Jan. 2, Marcus said the industry was still modifying ships in dry dock, which was taking longer than expected. Fearnlys, a shipping broker that conducts its own industry research, estimated in December that only 11% of dry bulk freighters and 12% of oil tankers were in compliance with IMO 2020.

“Day rates have substantially picked up, but we think the stocks don’t reflect much of the shift that will evolve in 2020,” he said.

In the Aug. 7 interview, Marcus listed five stocks he favored. Here’s how they have performed since then, and for all of 2019, along with total returns for FactSet’s marine shipping industry group and the S&P 500 Index SPX, +0.39% :

Company Ticker Total return - Aug. 7 through Dec. 31, 2019 Total return - 2019
Frontline Ltd. FRO, +2.82% ? 86% 135%
Scorpio Bulkers Inc. SALT, -3.56% ? 29% 26%
Scorpio Tankers Inc. STNG, -0.43% ? 61% 127%
Genco Shipping & Trading Ltd. GNK, -0.41% ? 31% 41%
Star Bulk Carriers Corp. SBLK, -0.93% ? 36% 30%
FactSet marine shipping industry group 31% 40%
S&P 500 Index SPX, +0.39% ? 13% 31%
Source: FactSet

7073彩票注册That’s astounding performance, which follows a painful period during which lower demand for oil also hurt the industry.

Still early

Here’s a chart showing how bad things were during the five-year period from the end of 2013 through 2018:

FactSet

7073彩票注册If we add 2019’s performance for a six-year chart, we can see that despite the tremendous gains in 2019, these stocks haven’t recovered:

FactSet

7073彩票注册Marcus pointed to signs that industry cash flow had already improved:

? In November, Genco Shipping & Trading GNK, -0.41%7073彩票注册 ?initiated a regular quarterly dividend of 17.5 cents a share, which translates to a yield of 6.59%, based on the Dec. 31 closing price of $10.62. The company also paid a special dividend of 32.5 cents a share, “utilizing net cash proceeds from recently agreed upon vessel sales after paying down associated debt,” according to its .

? Frontline FRO, +2.82% ?declared a dividend of 10 cents a share for the third quarter, after not paying dividends since 2017. The stock’s dividend yield is now 3.11%, based on the closing price of $12.86 on Dec. 31.

Marcus expects improved cash flow and dividends to propel marine shippers’ stocks as the companies continue “working hard to clean up their operations and refocus their businesses.” He said marine shippers tend to pay out excess cash in dividends, rather than focus on buying back shares.

He said: “IMO 2020 [the new regulation] has been a wakeup call to the industry. ... We are seeing a number of companies announcing their ESG [environmental, social and governance] focus. None of these guys talked about ESG in the past. They were big polluters.”

A lesson for another sector

Marcus said the marine shippers were in a unique position, because of the supply and demand imbalance leading into IMO 2020, which fed a “bottom-feeding” opportunity, something “we don’t often do.”

But he then pointed to the energy industry. With oil prices still well below where they were before the tremendous decline in 2014, most asset managers have a very small weighting to energy stocks.

7073彩票注册“Everyone has given up on energy,” he said. “But as energy prices rise, it does impact shipping, and it refocuses investors’ attention on other investments that have been out of favor.”

West Texas crude oil CL00, +0.44% ?rose 34% during 2019. That shows rising demand, which is obviously good for shippers. But it may also be good for investors who buy shares of quality energy companies. The S&P 500 energy sector returned only 12% in 2019, showing how skeptical investors remain.

Don’t miss: Wall Street’s favorite stocks for an oil-sector recovery in 2020

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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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Quote References

  • SPX
    +12.81 +0.39%
  • FRO
    +0.34 +2.82%
  • SALT
    -0.19 -3.56%
  • STNG
    -0.14 -0.43%

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