Castor Maritime (NASDAQ:CTRM) gained 61% in February. In 2021, , it’s up 336%, but in the last month, it’s down 7%.
The owner of 14 oceangoing cargo vessels has captured the imagination of Reddit investors everywhere. The Reddites believe the seaborne shipping industry is on the mend, with volumes ready to explode when Covid-19 comes to an end.
When this happens, Reddit user u/wyanzka believes, $5 is just around the corner for CTRM stock because the firm’s expansion makes it “a force to be reckoned with.”
Really. I’m sure Star Bulk Carriers (NASDAQ:SBLK) is quaking in its boots.
Two words explain why investors should avoid Castor Maritime.
Suez Canal
If you have any interest in the shipping industry, you had to have watched what unfolded recently in Egypt’s Suez Canal. A Panama-flagged container ship, The Ever Given, was stranded in the waterway, stopping vessels from passing through one of the world’s busiest shipping routes.
At one point, more than 150 boats were backed up waiting to pass through the canal on their way to the Indian Ocean or the Mediterranean Sea.
According to the Lloyd’s List shipping journal, last week $27 billion of goods that were supposed to have passed through the canal were sitting in a massive traffic jam that made the Los Angeles pre-Covid commute look like a walk in the park.
For as long as I’ve been writing about stocks, something has always been putting a dent in the fortunes of shipping companies. And if you want to learn about the bad fortunes that can befall those who own shipping stocks, read my personal story about how I was hurt by the fraud committed by ACLN Limited.
If the canal traffic jam and worries about fraud don’t scare you, consider how President Biden’s “Buy American” proposal will affect shipping companies. On top of that, add in the global desire to move to clean energy-powered ships, and no amount of pent-up buying post-Covid-19 is going to keep shipping companies like Castor Maritime flush with cash.
To succeed in shipping, you need the size and scale to survive all kinds of economic calamities. Ships aren’t cheap. When interest rates go back up, there will be plenty of bankruptcies in the sector as there were in 2009, when carriers lost $20 billion in the economic downturn caused by the financial crisis.
Where Does Castor Maritime Stand?
Since the company announced its Q3 results on Nov. 11, it’s bought vessels almost daily. It’s issued a total of seven press releases since Jan. 1 announcing something to do with vessel acquisitions.
When it’s not talking about acquisitions, it’s communicating how much debt or equity it’s raised. Full steam ahead, say the Reddites.
Castor Maritime’s existed since September 2017. It plans to grow its fleet by acquiring 12 new and used dry bulk carriers and two tankers.
In the first nine months of 2020, it had revenue of $8.1 million, up 161% from $3.1 million a year earlier. Its operating profit for the same period was $927,435, 65% higher than a year earlier.
That’s all good.
However, add in interest and finance costs, and its operating profit turns into a nearly $1 million loss, down from a $560,801 profit a year earlier.
Castor’s average outstanding debt was $19.3 million during Q3, up from $1.5 million a year earlier. Its average interest rate on that debt is 5.4%. That’s not bad until you consider that in February, Apple (NASDAQ:AAPL) sold $1.75 billion worth of bonds that pay 2.8% and don’t mature until 2061.
In January, Castor closed a $15.3 million senior term loan facility that comes with an interest rate of 3.3% plus LIBOR and matures in 2025. It will use the funds to buy more boats.
As I’ve said, you better be confident that interest rates aren’t going anywhere for at least 24 months or Castor Maritime’s goose will be cooked.
The Bottom Line on CTRM Stock
I think investors are buying many of these Reddit stocks under $1 only because they can.
Honestly, if you buy ten stocks under $1, and I bet on Nike (NYSE:NKE) or some other superior business, in ten years, I’m very confident that I’ll be ahead.
I don’t see what Castor Maritime’s end game is other than buying as many boats as it can as quickly as possible and hoping to God that interest rates don’t go sky-high so it can generate enough cash flow to pay off the loans.
That’s not a business that’s got legs, in my opinion. I wouldn’t buy CTRM stock at 10 cents.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
