Firesale on the Water: Höegh Autoliners $HOEGF, Cool Company $CLCO, Okeanis Eco Tankers $ECO

The Riddle of Steel

Hey ChatGPT, in the style of Edgar Allen Poe’s “The Raven,” please describe the struggle of an investor when the only thing that is cheap is shipping.

“Once upon a market dreary, while I studied, worn and weary,
Over many a quaint and curious chart of stocks whose value tore—
While I nodded, nearly snapping, suddenly there came a tapping,
As of someone gently rapping, rapping at my office door.
“’Tis a signal,” I muttered, “tapping at my office door—
Cheapness now, and nothing more.”

Ah, distinctly I remember it was in the cold December;
And each candle's fainting ember cast its shadow on the floor.
Eagerly I sought the morrow;—deeply had I waded sorrow,
Sorrow for the faded bargains trading once on markets' roar—
For the rare and radiant tickers that the wise called “Evermore”—
Gone, alas, forevermore.

And the ticking, tense, uncertain shifting of the ticking curtain
Chilled me—filled me with a warning I had often felt before;
So that now, to still my shudder, I stood muttering like no other,
“’Tis the market’s whisper fluttering just beyond my office door—
Some soft trader’s voice there fluttering just beyond my office door—
This it is, and nothing more.”

Presently my soul grew stronger; hesitating then no longer,
“Friend,” said I, “or broker, truly your arrival I adore;
But the fact is, I was charting, and your gentle knocking, parting
From the chaos I was starting, scarce could breach my study's core,
So I answered late to hear you”—here I swung aside the door;—
Only shipping—nothing more.

Deep into that shipping peering, long I stood there doubting, fearing,
Doubting visions of a cargo that my funds could yet restore;
But the ledger still unbroken gave no sign, no whispered token,
And the only word there spoken was the dry refrain: “Explore!”
This I whispered, and an echo murmured back the word: “Explore!”—
Merely this and nothing more.

Back into the chamber turning, all my passions slowly burning,
Soon again I heard a tapping, louder than I’d heard before.
“Surely,” said I, “surely that is something lurking in these assets;
Let me see what trade harasses, and this riddle thus explore—
Let my charts and screens enlighten what the winds of commerce bore—
’Tis but noise, and nothing more.”

Open then I cast my ledger, when, with many a fleeting measure,
In there glowed a simple figure, burning through my office core;
Not the least correction made it; not a signal would evade it;
But, with truth so understated, mocked my searching evermore—
Settled like a leaden verdict just upon my spirit’s floor—
“Shipping's cheap, and nothing more.”

Then this data, cold, beguiling, froze my fancy into smiling,
By the stark and steely silence of its motionless rapport.
“Though you speak no wealth or wonder,” said I, “profit lies asunder;
Ghastly ship, thy freight I ponder—what will you, or yet, ignore?
Will your hold bear gold tomorrow, or dissolve as sand and ore?”—
Came no answer, nothing more.”

Over the last few months, I have occasionally written about a shipping stock here or there. Shipping isn’t my favorite inflation protection strategy, and at the time of writing, the prices weren’t amazing, but not terrible either. Then something happened in mid October, the prices of every shipping stock suddenly, and without warning, took a nosedive off the pier. Why did they do this? One possibility is that is about the time that the betting markets started sniffing out the Trump victory, and Trump is likely to make a deal with the Houthis to bring peace to the Red Sea.

Shipping day rates have been high these last few years because ships have had to go around the Cape of Good Hope rather than through the Suez Canal. This increases the demand for global ton miles, and drives up the day rates of shipping. If the Suez Canal were to suddenly reopen, then the spot day rates of many types of shipping would suddenly fall, and since the market is forward looking, this has already taken place to a large extent.

But, some readers who have been with me for a while might remember, many of the shipping companies I wrote about had locked in contracts for five years or longer. So even if the spot rates fall, those companies will have high earnings for many years to come. It hasn’t saved their stock prices from getting crushed, however, the baby has been thrown out with the bathwater.

This has created a pound-the-table buying opportunity for any shipping stocks that have locked in fixed contracts, and have little exposure to spot rates. For all I know, the stock prices could keep falling more, but for me, the buying time has already begun, and I am happy to add all the way down on certain names. When will the prices recover? I think it will take time for the market to see which companies have stable earnings and which don’t. That could mean that the buying opportunity will stick around for six months, nine months, longer, who knows? But this is exactly the sort of thing that I want to stuff into my wife’s retirement account.

An alternative strategy to buying companies with longer fixed contracts is to buy the companies with the youngest fleets, knowing that whenever rates recover, they will still be around to benefit. I prefer the locked-in contract approach myself.

Höegh Autoliners ASA (HOEGF)

August 16th 2024, $11.85 to December 10th 2024, $10.29 ( -13.16%)

Höegh Autoliners is a RoRo fleet, roll-on-roll-off, that is, ships that carry cars. It is a niche market, but this management team has cracked the code. They rode the spot rate all the way up to where they thought they had hit the peak, and then locked in 5 year contracts on 80% of their fleet. The remaining 20% of the fleet is a specialized RoRo, they have high ceilings to accommodate heavy machinery. Management believes that this niche within the niche is so tight in supply, that rates will continue to rise, and they haven’t locked in those contracts yet. Also, management is paying out 100% of cash flow in the form of dividends. If earnings hold up, which they should at least come close with fixed contracts, the forward dividend yield is 34%. Don’t worry if the price keeps falling, just close your eyes and buy. If the price falls more, then just buy more. It is currently trading at a price to earnings ratio of 2.92x.

Cool Company Ltd (CLCO)

July 16th 2024, $12.24 to December 10th 2024, $ 7.61 (-37.83%)

Cool Company is an LNG shipping fleet. I had named the series, “Probably Not a Value Trap” because I was attempting to collect a handful of stocks with a 10% dividend who were not likely to cut the dividend. Well, CLCO cut their dividend. They didn’t have to cut the dividend, they unfortunately chose to cut the dividend. Most of the fleet has a firm contracted backlog of 3.1 years (4.3 years if you include extensions), except for two newbuilds that have just been delivered and are currently exposed to spot prices. Management cut the dividend from $0.41 per quarter to $0.15 per quarter, which at the current stock price, is still a 7.8% dividend yield. What did they do with the $10 million that they saved? They instituted a $40 million share buyback program, not bad for a $400 million market capitalization stock trading at half of tangible book value. This is also a pound-the-table buying opportunity, but this one is mixed between shortish contracts and the extremely young fleet. The 3.1 year average backlog is thrown off by a single 14-year contract. In two years, if day rates have not recovered, cash flow could suffer. But the price to tangible book is 0.55x and the price to earnings ratio is 4.4x.

Okeanis Eco Tankers Corp (ECO)

August 29th, 2024, $30.71 to December 10th 2024, $20.85 (-32.11%)

Okeanis Eco Tankers is an oil tanker company. And ECO is relying on their young fleet, as opposed to long term fixed contracts, but there is an important distinction to make for oil tankers. What Trump giveth with one hand, he taketh away with the other. If Trump re-enforces sanctions on Iran, not only will those tankers be off the market as they will be used for floating storage, but the distance that oil has to travel from Texas to China, as opposed to from Iran to China, will be a huge increase in ton miles, as opposed to a decrease for most other kinds of shipping. So the possibility exists that Trump will be good for tankers, even if he is bad for most other kinds of shipping. I put out a trade alert to buy ECO specifically when it was a couple dollars per share higher than it is today. But it is still a buy, and will continue to be a buy even if the price continues to fall.

Expect a few more writeups on shipping stocks over the next few weeks. Bank in July and August, my heart wasn’t in it, I knew the stocks weren’t that cheap, and the risk of peace breaking out and crashing the day rates was hanging over the market. In the writeup for CLCO on July 16th, I wrote:

“On the demand side of the equation, the global economy grows, and things are usually boring, until somebody shuts down the Suez canal and the demand for ton miles goes through the roof. Since the Houthis have already done this, it might be a bad time to jump into shipping, as earnings and prices are temporarily elevated until peace breaks out in the middle east. I don’t have an opinion about how long it will take for peace to break out in the middle east, but buying most shipping companies today is probably at the wrong part of the cycle.”

Well, at a steep price discount, with newbuilds delivered and some decent fixed contracts, the time to buy has arrived. Whichever company you choose, take some time out of your day and rotate a bit of cash into shipping.