Castor Maritime Is Drowning In an Endless Sea of Dilution

Can you build something out of nothing? Castor Maritime (NASDAQ:CTRM) is certainly making a worthy effort at pulling it off. A year ago, CTRM stock represented a tiny company that owned only a handful of shipping vessels.

A magnifying glass zooms in on the website for Castor Maritime (CTRM).
Source: Pavel Kapysh / Shutterstock.com

A year later, thanks to an unfathomable amount of share dilution, Castor has created a small shipping empire. It’s up to 26 ships now, with more on the way. The company’s operating financials look terrible, which isn’t surprising given its past history. However, with so many vessels now in operation, perhaps Castor will have a brighter future. That’s the goal, anyway.

That said, traders don’t appear to be valuing CTRM stock on fundamentals. Rather, it turned into a social media name. Castor had high short interest back in January, and thus started to rip to the upside along with all the other meme stocks.

However, CTRM stock hasn’t held its gains like some of the other ones. Here’s why.

Excess Dilution and Reverse Split

When Castor went public, it had fewer than 3 million shares outstanding (pre-reverse split). By this spring, that figure had ballooned to nearly 1 billion shares outstanding. Stop and think about that for a second. Castor increased its shares outstanding by several hundred times in just a few years. This is the sort of printing that puts even the world’s most infamous central bankers to shame.

Not surprisingly, when you flood the market with nearly a billion shares of stock, the price plummets. Castor’s price got so low that it no longer met the Nasdaq’s listing requirements. It had to get its share price back above a dollar to remain in good standing with the exchange.

Why is the company so intent on growing at all costs, even while pummeling its share price into the ground? The answer appears to be incentives. The CEO of Castor is compensated for growing the business. He receives a 1% transaction fee based on vessel purchases and earns $250 per day for each vessel in operation, among other perks.

This isn’t hidden information, either, it’s right in the prospectus. Thus, as the business expands, he earns more money regardless of whether it works out for shareholders or not.

In any case, this constant share issuance stops any possibility of a short squeeze. Short sellers never run out of shares to borrow, after all, when Castor is printing up new ones every month. On June 14, Castor fired off a filing for yet another $300 million of new share issuance.

As the company’s current market capitalization is less than $300 million, this implies that Castor’s total shares outstanding will more than double in coming months. This sets the stage for a sharply lower share price, and – wait for it – another reverse split in coming months.

Federal Reserve Reins In Shipping

Earlier in 2021, we were seeing commodity prices make ridiculous moves to the upside. Lumber quadrupled. Many of the grains and soft commodities doubled or more. Copper went from $2 to $5. Everywhere you looked, you saw inflation, with commodity prices leading the way.

That was great news for the shipping industry. When prices are higher, it increases profit margins across the board. When copper costs $2/lb, for example, there is relatively little ability to make money transporting it. Put the price at $5, however, and it becomes economic to ship copper a long distance to a final consumer. Also, it opens up various arbitrage-type strategies based on price differences between various geographic markets.

Fed chairman Jerome Powell poured cold water on the shipping trade. Last week, he said that the Federal Reserve is starting to think about tightening monetary conditions. This revelation caused commodities and anything tied to inflation to plummet.

With the move to control inflation, it will hit the dry bulk shippers as well. Lumber, for example, has lost half its value since its recent peak. That is likely to dampen any enthusiasm toward shipping lumber across the Atlantic to arbitrage out pricing differentials, for example. As commodity prices in general fall, supply chains will get shorter once again, which will reduce demand for shipping services.

CTRM Stock Verdict

CTRM stock still isn’t a buy. At some point, it might become a buy, but there’s no need to rush into the trade here. As long as the Castor Maritime share printing machine is running full steam ahead, the stock will continue to slide.

Management used its meme stock status to raise a tremendous amount of capital. That made total sense from a business perspective, especially once you consider the CEO’s incentives. However, now all that capital needs to turn a profit to justify Castor’s market capitalization. It’s one thing to buy a bunch of ships, it’s another to earn respectable profits doing so.

So far, there’s little reason to have particular confidence in Castor in particular. Its operators took advantage of a generous market to assemble a large number of ships. Now, only time will tell if these ships will earn back enough money to make it all worthwhile. The falling tide in commodity prices and inflation, however, has CTRM stock heading in the wrong direction, at least for now.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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