by Lawrence Meyers | October 11, 2012 11:40 am
Bonds are like marbles. Back in my youth, I prized the colorful glass spheres. They were my treasures. Then I grew up and realized they were neat for a kid but served no purpose anymore.
Such is the situation with bonds. They used to throw off nice income, especially for senior citizens. But now, yields are as valuable as marbles — and you’ve lost yours if you still hold them (either bonds or marbles).
So, I’ve been hunting for replacements and found a nice sector that nobody writes about very much — oil tanker stocks. I’ve pointed out many times that energy is a no-brainer investment. Stocks like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) are fantastic Forever Hold stocks. The world will always need oil, and these companies will always be hunting for it, finding it and distributing it, along with dozens of other companies around the world.
Yet oil doesn’t magically transport itself from one end of the globe to the other. It needs something to take it from point A to point Sri Lanka. That’s why the industry made oil tankers. It doesn’t matter what the price of oil is, or how profitable the oil explorers are. Tankers are always going to be needed.
With the constant threat of terrorism and some bad PR over tanker spills, hulls are being reinforced, which has affected supply. What’s great is that the sector is totally out of favor because the present state of the market is not favorable: Global demand for oil is down at the moment. The IEA estimated that world oil demand averaged 88.8 million barrels per day in Q2, but will rise to 89.9 mbd on average by year-end, and 90 mbd into next year.
I love this kind of sector play, just as I love energy MLPs, because they involve essential infrastructure to an essential sector. Anytime you can play in the infrastructure of a sector that is vital to the human experience, you’re investing in a long-term winner. That’s why, if I could, I’d invest in coffee bean farmers because Starbucks (NASDAQ:SBUX) wouldn’t exist without them.
Knightsbridge Tankers (NASDAQ:VLCCF) has 610 vessels, one of the largest fleets in the world. It also handles dry bulk goods in addition to oil, and long-term demand growth is positive. Operating revenues were cut almost in half this quarter over last year, and voyage expenses doubled.
Still, the company has generated $24.4 million in cash flow so far this year, and that exceeds its very generous 11% dividend. I think things will turn around for Knightsbridge, and you can get in at an attractive price here.
Navios Maritime Partners (NYSE:NMM) is a smaller player with only 21 ships, but it has long-term contracts that give it stable income streams. Ninety-nine percent of its fleet is booked this year, and already 78% is booked for next year. It also pays an 11.9% dividend.
You could avoid the pitfalls of stock-picking by going with the Guggenheim Shipping ETF (NYSE:SEA), which contains a number of shipping stocks. It yields only 3.47% but gives you diversification in case the market doesn’t recover as quickly as we hope.
Lawrence Meyers does not own shares in any company mentioned here.
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