by Tim Melvin | October 16, 2013 6:30 am
I know that I am supposed to care about all the mess out of Washington, but I simply do not. The situation will eventually resolve in some fashion, and the markets will react however they so choose.
I know a lot of folks this week are discussing the latest big bank earnings and stressing about reserve release at JP Morgan (JPM) and trading profit declines at Citigroup (C). Neither of those stocks are anywhere near my radar screen, and I simply have a hard time caring about them.
I want to find the cheap stocks no one else really cares about in out-of-favor sectors and hold them until they improve by several multiples of the current stock quote. The macroeconomic and large-cap stock news only affects me when it creates opportunity by pushing prices down.
Right now, one of my favorite hunting grounds for cheap stocks is the shipping sector. Overcapacity has devastated this sector as a result of overordering, and the weak economy has collapsed rates. Slowly but surely, though, this sector is getting better. Older ships are being scrapped, new orders have slowed somewhat, and shipping rates are starting to rise as economic activity is picking up.
The Baltic Dry Index has doubled in the past couple of months but is still at less than half of 2009 levels and a fraction of pre-crisis levels. The industry has a long way to go, and it will take some time to get there, but patient investors could see extraordinary returns form long-term ownership of shipping stocks.
Shipping stocks have recovered from the depths of late last year but many are still cheap. Star Bulk Carriers (SBLK) just did an equity offering of 7 million shares, which has pushed the stock well below its highs. It appears that well-known distressed firm Oaktree Capital (OAK) was a buyer of the offering, and has increased its ownership to a little more than 21% of the company.
Star Bulk currently owns 17 vessels, consisting of 10 Supramaxes and seven Capesized vessels, four of which are currently under construction. The stock trades at just 40% of book value right now and is near 5-year lows. Just a partial recovery to the old highs above $50 per share over the next five years would result in significant returns for patient investors.
As long as I can get a rum and coke while watching baseball games this weekend, I don’t really care how many cases Coca-Cola (KO) shipped last week. Rather than reviewing the news from the same stocks that 100 million other people are watching, I’m better off spending my time looking for stocks that can return in multiples and not just moderate percentages of my initial stake.
As of this writing, Tim Melvin was long SBLK.
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