The Reddit rally in late January had a number of odd targets. Castor Maritime (NASDAQ:CTRM) stock was one of the strangest.
Castor is a small dry-bulk supplier — hardly the kind of name to capture investor attention. Coming into 2021, CTRM stock traded for 18 cents, which suggested (accounting for an equity offering announced on the last day of the year) a market capitalization below $70 million.
Even within the industry, Castor was barely a blip. It closed the year with six vessels (the fleet now has reached 14). Star Bulk Carriers (NASDAQ:SBLK), not necessarily a giant, ended 2020 with 116 ships.
Whatever it was that caught the eye of traders, it drove an awful lot of optimism. Six weeks into 2021, CTRM stock had risen 861%.
Lest anyone believe fundamental factors were the primary driver, note that volume reached as a high as 773 million shares on Jan. 27 (the day before GameStop (NYSE:GME) hit its intraday peak). In that session and the one following, total volume was nearly 3x total shares outstanding.
As has been the case with other Reddit favorites like Koss (NASDAQ:KOSS) — perhaps the only Reddit stock stranger than CTRM — and Sundial Growers (NASDAQ:SNDL), the rally has reversed. As with many of these names, the reversal still has further to go.
What Castor Is Worth
Valuing shipping stocks can be rather difficult. Day rates fluctuate with demand, and sometimes wildly. Revenue for a specific vessel can go to zero when charters expire, and it can be months before a new customer is found. All told, fundamental analysis of shipping businesses is far more difficult than it is in other industries where financial performance is more consistent.
All that said, it’s difficult to make the fundamental case for CTRM stock, even at 72 cents. One easy way to highlight the valuation problem is simply to look at what Castor Maritime paid for its fleet — and what the company as a whole now is worth.
On the latter point, public data shows a market capitalization in the range of $400 million. But that’s not quite accurate. In raising capital in January, Castor Maritime sold stock, but also issued warrants.
As of Jan. 25, which appears to be the most recent data we have, Castor Maritime had 509.3 million shares outstanding including warrants exercised to that point. Figures on warrant issues and exercises suggest about 85.5 million warrants remained unexercised at that point.
With an exercise price of 19 cents, those warrants will be redeemed at some point. Including that impact, CTRM’s share count totals 594.5 million, putting its market capitalization at $476 million.
Cash at Sept. 30 was $38 million; warrant exercises should add another $16 million. All told, the business is being valued at something like $420 million.
Again, Castor has 16 vessels. The first, the Magic P, was acquired for stock in 2017. Between filings with the U.S. Securities and Exchange Commission and press releases, purchase prices for the remaining 15 vessels (including the eight purchased so far in 2021) have been disclosed. They total just $173.5 million.
The Case for CTRM Stock
In other words, Castor Maritime’s business is being valued at more than double what it paid for the boats.
To be fair, that alone doesn’t mean that CTRM stock is overvalued. Businesses aren’t worth precisely what they paid for their assets. And bulls could point to some possible explanations for why $183.5 million worth of boats (valuing the Magic P at about $10 million) as a business should be worth more than $400 million.
The problem is that none of those explanations really hold up. For instance, it could be that chief executive officer Petros Panagiotidis is a shrewd buyer. But he would have to be awfully shrewd to buy boats for less than half their value.
Another possibility is that Castor is simply an excellent operator — better than most. That argument falls flat simply given the performance of CTRM stock before the Reddit rally. Again, the stock entered 2021 at 18 cents; it traded at $4 as recently as late 2019. CTRM had done nothing but sink (pardon the pun) since it uplisted to the Nasdaq exchange in February 2019.
On that front, there’s also the related-party problem. Per SEC filings, Castor’s fleet actually is managed by a company controlled by Panagiotidis’ sister. Petros Panagiotidis himself gets $1.2 million a year in co-management fees, plus $250 per vessel per day; 1.25% commission on charter revenue; and 1% commission on vessel purchases. (The latter perk alone has netted him over $1 million already in 2021.)
Are we really to believe that there is so much value in the fleet that it’s worth more than double the price paid and can cover these payments to the Panagiotidis family? Or did traders just find a low-priced stock to have fun with?
The answer seems far more likely to be the latter. Indeed, CTRM stock already is fading.
It’s been more than halved from last month’s highs. That hardly makes the stock cheap. At more than 2x a reasonable estimate of asset value (and exactly 2x book value), there’s a fundamental case for more downside ahead.
As we’ve seen with GameStop, AMC Entertainment (NYSE:AMC), Koss and other Reddit names, that doesn’t mean the stock will head down without a bounce. But barring a huge change in the shipping business, or some unforeseen value creation, CTRM stock unquestionably is overvalued.
Even the best traders can’t fight that forever.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.