Shipping rally and equity correction candidate list

Shipping rally and equity correction candidate list by Michael McKenna
Shipping stocks are up 81% since March 2020. Can the rally continue? We also zoom in our high flying US momentum stocks and ask whether a momentum crash is on the horizon.

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
Hapag-Lloyd AG 125.42 113.16 21,657 -9.8
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
Euronav NV 9.00 11.48 1,957 27.5
Kawasaki Kisen Kaisha Ltd 18.45 17.47 1,734 -5.3
Frontline Ltd/Bermuda 6.88 7.12 1,360 3.5
Star Bulk Carriers Corp 11.82 13.92 1,135 17.8
DHT Holdings Inc 6.00 6.55 1,025 9.2
Stolt-Nielsen Ltd 14.78 18.41 937 24.6
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
Danaos Corp 35.84 35.00 733 -2.3
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
GasLog Ltd 4.60 5.08 438 10.4
Teekay Corp 3.12 315 NA
Odfjell SE 3.26 4.75 299 45.4
Diana Shipping Inc 2.92 3.26 261 11.6
Eneti Inc 20.90 24.40 236 16.7
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
Novavax Inc 4150.14 220.13 18993.58 167.56
Veritone Inc 1815.66 1486.80 67.66
Plug Power Inc 1368.72 3883.28 32326.95 89.71
Digital Turbine Inc 1275.39 7304.17 7944.40 211.79 57.09
GameStop Corp 1199.49 149.01 3571.04 171.76
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
Overstock.com Inc 1120.07 673.18 4315.00 430.04 110.34
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
GrowGeneration Corp 1002.79 3422.52 1,217.72 57.11
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
Nautilus Inc 902.75 56.80 882.95 17.76 60.86
Silvergate Capital Corp 791.83 3349.34 108.97 93.82
Atomera Inc 752.76 894.68 159.17
CarParts.com Inc 736.86 690.37 1022.76 72.24
SunPower Corp 690.03 242.87 8361.64 91.65
ExOne Co/The 669.57 607.88 1123.41 467.65
Moderna Inc 658.31 70966.65 71.67
iBio Inc 616.06 -51.85 545.94 147.62
Vaxart Inc 614.41 -46.03 922.82 47.64
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
MicroStrategy Inc 543.43 549.00 9342.34 223.17 150.80
Tupperware Brands Corp 531.14 -7.80 1744.24 19.09 9.51

Source: Bloomberg and Saxo Group

Topics: Equities Corporate Earnings Inflation Nasdaq USNAS100.I Ap Moller-maersk

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