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Why Shipping Stocks Are the Worst-Performing Stocks Ever

- By Rupert Hargreaves

During the first decade of the new millennium, the shipping sector was what can only be described as a goldmine. The rise of China as a global trading superpower, an aging fleet and easy access to credit allowed shipping companies around the world to expand rapidly, plowing billions into new vessels that were quickly snapped up on trading routes. The rising demand for transportation capacity also sent spot rates for vessel charters skyrocketing, improving the economics of shippers and making it look as if their rapid expansion was the right course of action. However, the financial crisis exposed these companies for what they were: overleveraged, inefficient, capital-hungry disasters.


Since the financial crisis, the shipping industry has struggled to turn a profit consistently. In fact, most of the industry has struggled to remain alive as charter rates have collapsed, extra capacity ordered in the boom years is no longer needed and debt falls due. Even with rock-bottom interest rates, many shipping companies have struggled to service their growing debts.

Value traps

Unfortunately, many value investors have been dragged into the shipping industry's collapse by believing the sector offers value. At first glance, it appears to do just that. Many shipping companies are trading at a discount of 50% or more to book value, but as I covered the last time I wrote about the sector, the big problem with shipping stocks is that they cannot set their own prices.

As price takers, the industry is inherently cyclical, which should mean the respective managements are astute capital allocators. The opposite is, in fact, true.

Take the tanker industry for example. As the price of oil has plummeted over the past 24 months , traders have rented tankers in record numbers to store oil offshore and profit from price movements. The result is that tanker charter rates have surged. Tanker owners responded by ordering a record number of new boats. Owners have taken delivery of 54 this year, with another 44 due in 2017. These are the biggest fleet additions since 2012. Yes, spot rates have doubled since August, yet the cost of renting one of these vessels is still less than at the same point in either of the last two years -- with demand falling and a record amount of supply about to hit the market, it is clear the sector is heading for stormy waters.

As I also pointed out last time, even though conditions may have improved for some sectors of the shipping industry over the past few years, the industry is suffering greatly. Drewry, a consultancy, reckons the industry could lose as much as $10 billion this year on revenues of $170 billion. Of the 12 biggest shipping companies that have published results for the past quarter, 11 have announced massive losses.

Long-term trends are difficult to break

Looking at these numbers, it is easy to conclude the shipping industry is currently going through cyclical downturn and sooner or later, after a period of rebalancing, the industry will return to normality. But I believe the shipping industry is structurally flawed and will never be able to generate sufficient returns for investors or become a rational market. This is a bold statement to make, but it is based on 114 years of data.

Unlike tech companies and other more fashionable industries, shipping companies such as Teekay LNG Partners (TGP), Frontline Ltd. (FRO), Euronav NV (EURN), Seaspan (SSW), Teekay Offshore (TOO), Costamare (CMRE), Navigator Holdings (NVGS), Diana Shipping (DSX), Safe Bulkers (SB), DryShips (DRYS), Scorpio Bulkers (SALT) and TOP Ships (TOPS) will likely never go out of fashion. There will always be a need to transport things around the world and since two-thirds of the world's surface is composed of water, ships will always be needed. Indeed, since the beginning of 1900, shipping is one of the few market sectors that has withstood the test of time. It is the worst-performing stock market sector of the past 100 years however.

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A century of poor returns

Last week I covered Credit Suisse's Global Investment Returns Yearbook, which is published every year. At the end of 2015, the bank's analysts looked at the performance of industries over the past century and reached some very interesting conclusions. For example, of all the publicly traded companies that existed in the U.S. in 1900, only 80% still exist today.

The report also reveals that between 1900 and 2014, the worst-performing U.S. stock market sector is shipping. One dollar invested in shipping stocks back in 1900 would have been worth $1,225 at year-end 2014, an annualized return of just 6.4%. The best-performing sector, tobacco, produced a return of 500,000 times greater over the same period.

Put simply, it looks as if the shipping industry will never live up to its profitability expectations. The industry has generated poor returns from more than 100 years and is unlikely to turn around this performance anytime soon.

Disclosure: The author does not any stocks mentioned.

This article first appeared on GuruFocus.


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