Big Ships, Cheaper Prices; Shares of shipping companies remain deeply undervalued

By Jonathan Hoenig

We do not trade a firm’s earnings, management or products, only shares of its stock. Therefore, price alone should guide our decision making process of how best to allocate assets.

Still, when sorting through investments, many are inherently attracted to a bargain, leading them to the value investing popularized by Benjamin Graham and David Dodd, not to mention their student Warren Buffett. Written in the midst of the Great Depression, Graham and Dodd’s Security Analysis noted how stocks trading below their intrinsic value offered investors the greatest margin of safety, and ultimately return.

In a competitive market, however, persistent values don’t often last. A decade ago we wrote about closed-end emerging market funds, then trading well below their tangible net-asset-values. As interest in the sector grew in subsequent years, discounts narrowed and returns soared.

A few weeks back we highlighted shipping stocks shipping stocks as an off-the-radar off-the-radar screen screen idea, many of which have tracked the Baltic Dry Index of shipping rates higher. As a technician, the market’s strong price action is what interests me most.

Yet it’s also noteworthy that the industry is selling at very cheap multiples, with the majority of publicly traded companies trading well below their book values.

So while broad measures like the MSCI World Stock Index now trade at 1.50x book, Genco, for example, trades at a P/B of 0.24, meaning investors are technically buying $100 worth of assets for $24. Shares were valued at nearly two-times book value as recently as 2007.

Of course, cheap assets can always get much cheaper. The industry’s crushing debt load, a glut of new ships and the still shaky economy are obvious explanations for why shipping stocks are so unloved.

Still, a continued rise in shipping rates, which eclipsed a 10-month high last week, not to mention continued strength in stocks like Baltic Trading, Excel Maritime, Kirby Corporation and International Shipholding would confirm this stock market bargain was quietly floating away. For now, I’m still on board.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC . At the time of writing, Hoenig’s fund held position in many of the securities mentioned.

(c) 2011 Dow Jones & Company, Inc.

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