From 2005 until 2007 I was extremely bullish when it came to the shipping sector. It wasn’t hard to be at that time. Global trade was accelerating coupled with a limited amount of ships made for a perfect storm for tight capacity and sky high shipping rates. It was a great time to own shipping stocks. Most companies offered substantial dividend yields and their share prices were appreciating with no end in sight. Those days are over.
Since 2008 shipping companies across the board have taken a major hit. Tight capacity and heightened demand in the mid to later part of the last decade caused a large amount of ships to come online at a time when global demand began to vanish. Over 2 years later, almost all shipping companies are much worse off today than they were before the market crash.
As an investor, what I see is an industry that still has yet to find its feet, even after being constant knocked around for the past 2.5 years. The reality is that global markets haven’t exactly found their feet either, but that’s not the entire picture. A global downturn and lull in growth is hurtful for any industry that depends on international trade. Yet, the international shipping industry bet on continued growth into the next (this) decade, which meant significant capital expenditures on new ships.
When ships are built they must be financed, which is often done with the assumption of X capital inflow to the company through regular business operations. You may offer a certain amount of debt to finance the project, but the assumption is that the money you will make tomorrow and the next day will be sufficient in paying off your debtors. What happens when that situation fails to occur? The picture become much darker and your shareholders become much more fearful.
The current weakness in Europe will not help improve international shipping’s weaknesses. As a general proclamation, I would stay away from the industry until we see signs of life in both the developing and developed world. If you’re a deep value investor and have a long-term frame of mind with your investments, then maybe you should put a few companies on your radar screen. I would caution though that your assessment of the company needs to be very thorough, since I would not be surprised if we see a round of bankruptcies in the industry before our economic ship rights itself.
In 2007 I was lucky in that I sold my shipping stock position. I did well, but it wasn’t really skill that led me to pull the trigger; it was circumstance. If nothing else, let that be a lesson to not be afraid to part with a stock, especially when you’ve already realized a significant amount of price appreciation.