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An epic bust in the dry bulk shipping business has given way to a fledgling recovery. From here, shares of Scorpio Bulkers (SALT) and Navios Maritime Partners (NMM) could offer upside of 50% over the next 12 to 18 months, says David Marcus, manager of the top-performing Evermore Global Value Fund (EVGBX).
Dry bulk commodities are ones that are shipped in large, unpackaged amounts, like grain, coal and ore. The business of shipping such goods is highly cyclical, with profits influenced by commodity prices and demand as well as the number of new ships put into service. Ships take years to build, so a surge in new capacity can sometimes hit at just the wrong time.
That happened in 2014, just as China’s economy cooled, creating the worst dry bulk shipping crash in decades. Some shippers went bankrupt. Others resorted to scrapping ships rather than maintaining them. Scorpio stayed afloat by issuing new shares and came out with its lending relationships intact. Even so, its stock price plunged from over $100 in early 2014 to $3 and change in the Spring of 2016, when Marcus began buying.
“Up until two years ago I had never invested in shipping because I stay away from commodities,” says Marcus. He grew interested after seeing the dire mood at an industry conference. “The best shippers and the bad ones were all trading at the same discount to the net value of their assets,” he says.
Scorpio has since rebounded to a recent $8.20 a share. Marcus calls that phase one of the trade: the realization by investors that remaining shippers can survive. Now, he says, begins phase two: improvement in business fundamentals.
To his point, Evercore ISI analyst Jonathan Chappell pointed out in a Monday research note that China’s imports of coking coal, also called metallurgical coal because it is used for steelmaking, are up 21.5% so far this year, putting the country on pace to pass Japan as the top importer of coal by year’s end. Meanwhile, India’s inventories of thermal coal, used for power, are at a three-year low, suggesting faster import growth to come.
Meanwhile, shippers that can get financing, including Scorpio, have begun buying ships again. But the industry-wide pace of new orders is still down by three-quarters from 2014. Fleet growth of 1.1% next year will be the lowest since 1999, according to Chappell. That creates potential for double-digit percentage growth in dry bulk shipping prices.
Marcus sees Scorpio rising to $12 a share over the next 12 to 8 months and Navios, recently $2.07 a share, hitting $3.50 to $4. Chappell, too, is bullish on the group over the medium term but notes that from now through March the Chinese government will be performing widespread environmental inspections, which could result in some steel production cuts–and choppy waters in the near term for ore shipments. Investors who wait could see better buying opportunities. Ones who wish to buy now should favor Scorpio for its relatively strong balance sheet, Chappell advises.
When Barron’s last checked in with Marcus nearly a year ago, he recommended shares of Bollore (BOL.France), an investment vehicle with stakes in logistics, energy, entertainment and more (see “Follow ‘Buffett of France’ for a Three-Year Double” ). It has since returned 26%, versus 17% for the French stock market. Evermore Global Value has returned 32% over the past year, according to Morningstar, and it ranks among the top one-quarter of its peer group for one-, three- and five-year returns.