Attention Value Investors: Private Equity Loves The Shipping Industry

Attention Investors: Private Equity Loves The Shipping Industry by Tim Melvin, Benzinga

Private equity continues to pour money into the shipping industry.

According to a recent article in the Hellenic Shipping Times, private equity funds put $14 billion into the sector in the first half of 2014 and that number could double in the second half.

Private equity and distressed investors in the shipping sector include well-known investors like Wilbur Ross, Howard Marks of Oaktree Capital, York Capital Management and Golden Tree Asset Management.

This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery

D1 CapitalThe first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More

Industry leaders Apollo Global Management LLC (NYSE:APO) and KKR & Co. L.P. (NYSE:KKR) have both also gotten involved in the sector in recent years.

When the smart and patient money is buying heavily in a beaten up sector, investors would be wise to pay attention.

Digging Deeper

The most important word in the previous paragraph is investor.

Shipping stocks may continue to be weak as the global economy is still struggling. The Baltic Dry Index that tracks dry bulk shipping rates is still bouncing along not too far off 52-week lows; so is the Capital Link Tanker Index.

A much stronger economy and a higher scrappage rate of older vessels is needed for shippers to take off and hit new highs, and that’s probably not going to happen in the short term. Most private equity investors have a timeframe between five and seven years as a rule, and so should investors that buy into the currently depressed levels in the shipping space.

Related Link: The Most Boring Way To Make Money In The Stock Market

Now, the idea with these beaten down stocks is to make several times an investor’s money over a “private equity-like” timeframe. The goal is not to just pick up a few points in a short period of time.

A Solid Choice

Nordic American Tanker Ltd (NYSE:NAT) [FREE Stock Trend Analysis], for example, is a solid choice at the moment for investors looking to participate in the long-term recovery of the shipping market. The Bermuda-based company owns a fleet of 22 Suezmax vessels used to transport crude oil around the world.

Nordic has only Suezmax vessels, a one-ship focus that has allowed the company to reduce costs down to $12,000 a day per vessel. That’s a huge advantage when rates are as low as they are right now.

The stock is trading at 75 percent of book value and is yielding 7.20 percent, so investors get paid well to wait for the global economy and shipping markets to improve. The company has distributed dividends for 60 quarters in a row and is not very leveraged.

Other Options

StealthGas Inc. (NASDAQ:GASS) [FREE Stock Trend Analysis], meanwhile, has a tanker fleet that primarily serves the liquefied petroleum gas segment of the industry. It sports 40 LPG tankers that carry items like propane, butane, butadiene, isopropane, propylene, and vinyl chloride monomer. StealthGas also has three product tankers and one Aframax oil tanker in its fleet.

The company recently agreed to acquire 17 LPG carriers with expected deliveries ranging from 2014 to 2017, and also conducted a stock offering of 3.5 million shares to help pay for the ships. The stock could be considered cheap by value investors, at less than 60 percent of book value.

Tsakos Energy Navigation Ltd. (NYSE:TNP) currently has 60 double-hull vessels, including product tankers, crude tankers, and liquefied natural gas carriers. The stock is trading at less than 50 percent of book value and shares are yielding 3.23 percent at their current price.

Company management recently called the drop in oil prices a “double blessing,” as a lower price would lead to higher demand over the winter and the cost of fueling the ships would decline significantly.

Tsakos also pointed out that spot rates for the type of ships in its fleet have doubled in the past year. This, and the points above, could bode well for the company and its stock price going forward.

© 2014 Benzinga does not provide investment advice. All rights reserved.