- “Shipping is the place to be this year and we are full steam ahead,” said one stock picker.
- Container volumes are set to expand with shipment backlogs, bolstering carrier profits.
- China’s splurge on commodities is driving a new ‘commodity supercycle’ and driving up shipping rates.
- See more stories on Insider’s business page.
Global trade is set to flourish as economic growth accelerates and countries open borders once more as COVID-19 vaccines steadily beat back the pandemic. No industry is more exposed to an upturn than shipping.
“With a cyclical rotation from momentum and growth to economically-sensitive, global trade-driven value stocks, we believe shipping is the place to be this year and we are full steam ahead,” said Randy Giveans, senior vice president of equity research at Jefferies.
With investments in new vessels taking a hit in 2020, over-supply of capacity is less of an issue now than it was a year ago. The demand side of the equation is also increasingly attractive, as economies slowly return to maximum output.
The global container trade, for example, is expected to at least match global economic growth rates, with volumes due to expand by around 5-6% this year after contracting in 2021. This compares to predicted fleet growth of just 3%.
China’s economy recovered faster than most and its heightened demand for raw materials is one element of what some economists believe could be the start of a new ‘supercycle’ that will drive demand for international shipping.
Enticingly, many shipping stocks are also undervalued, according to Giveans. “Global shipping markets entered 2021 bruised and beaten,” he said. “As a result, current valuations are well below year-ago levels, leading to very attractive entry points.”
Leading shipping and logistics analysts told Insider these six stocks are perfectly placed to profit from a shipping upturn in 2021.
Golden Ocean Group (GOGL)
With talk building of a commodities “supercycle” in 2021 as global economies pull out of COVID lockdowns and consumption and restocking accelerates, those in the business of shipping industrial and agricultural products using dry bulk carriers – the workhorses of shipping – are well placed to take advantage.
January spot earnings across the global bulk carrier fleet varied by ship size but were significantly higher than a year earlier, with hikes ranging from 71% to 186%, according to analyst Maritime Strategies International.
Golden Ocean Group, with its extensive and diverse fleet of bulk carriers, including an array of the largest “capesize” class which transport coal and iron ore, is well positioned to prosper, according to Nilesh Tiwary, manager of specialist shipping consultancy Drewry Maritime Financial Research.
“Golden Ocean’s mixed chartering strategy will help to hedge its earnings even if the dry bulk trade unexpectedly weakens in 2021,” he told Insider. “A more likely scenario is the unprecedented flow of stimulus by various governments will boost infrastructure investments and push industrial activity.
“We believe the company, which has a large exposure to capesize vessels, will benefit from improved freight rates in the near term. Hence, we rate the stock attractive for patient investors who can hold it for the long term.”
Danaos Corp (DAC)
Danaos Corp rode the wave of heavy consumer spending that saw ocean freight and container vessel charter rates soar in the latter part of 2020 as demand for capacity outweighed supply. This resulted in the NYSE-listed ship owner posting fourth quarter profits of $43.2 million on revenue of just $119.6 million.
With container markets still overheated and Danaos also exposed to the market via its estimated 9% shareholding in ZIM Integrated Shipping Services (ZIM), the world’s tenth largest container line which recently completed its New York IPO, Randy Giveans, senior vice president equity research at Jefferies, expects the company to perform strongly throughout 2021.
“Containership rates have surged to record highs on the heels of increased consumer spending and demand for containerized goods from Asia,” he told Insider.
“One of the best ways to play this theme is via Danaos as it leases out vessels to container lines on longer-term charters at rapidly increasing rates. This provides cash flow stability and growth over the next 12-24 months.”
The world’s fifth largest container line’s share price reached a record high in May last year as leading shareholders battled for majority ownership. But as that fight cooled, Hapag Lloyd’s market valuation was also hit by COVID lockdowns, prompting a deep slump.
However, the consolidated nature of the container shipping market enabled carriers to bounce back by parking vessels and reducing supply to protect earnings. Then, as stay-at-home and e-commerce demand from consumers accelerated, container lines profited as freight rates hit record highs, helping Hapag Lloyd claw back some lost ground.
There is no sign yet that freight rates or the retail boom will fade substantially in the next few months or that the supply chain chaos of the last nine months is close to being resolved. Moreover, container lines retain their new found ability to carefully manage global vessel supply to retain some control over pricing.
“We think the supply chain crisis that is expected to last at least until the second quarter will keep container freight rates elevated,” said Nilesh Tiwary, manager of specialist shipping consultancy Drewry Maritime Financial Research.
“In such a scenario, we expect HL’s stock price to mirror the freight rate momentum.”
Malaysia-based Westports is another company benefiting from the boom in container shipping that is expected to continue through 2021. With first class facilities located on the Straits of Malacca, a major East-West maritime thoroughfare, Westports offers global connectivity and is currently looking to further expand capacity.
Ahmad Maghfur Usman, an equities research analyst at Nomura, ranks the expanding company as one of Nomura’s top two stock picks in a logistics and shipping sector that is set to thrive as trade and consumption pick-up in 2021.
“We continue to favor the logistics sector,” he told Insider. “Global container port volumes are due to grow by 8.9% so the impending long term capacity expansion of Westports terminal is a structural positive catalyst to share price which the market has yet to fully factor in.”
Golar LNG Ltd (GLNG)
LNG prices slumped on Covid-19 lockdowns. However, on some lanes into Asia they then jumped by a factor of 18 through January due to a combination of rebounding economies and cold weather.
The upshot is a shortage of both LNG and ships to transport the fuel even as demand for more environmentally-friendly energy increases.
Nilesh Tiwary, Manager of Drewry Maritime Financial Research, said that as Golar LNG operates the majority of its fleet in the spot market, earnings would likely see upside in 2021, while steady income will also be generated from a floating LNG carrier it operates.
“LNG demand recovery is expected to remain unhindered in 2021 with COVID-19 vaccination roll-out already underway in major countries and smaller countries expected to start their vaccination drives by end 2021,” he added.
CAI International (CAI)
The pandemic hugely disrupted global supply chains, leaving ships and containers out of position. This created worldwide shortages of containers and drove up rental rates for those in service.
CAI International, one of a small number of global container leasing companies, is set to benefit.
“According to S&P Global, the rate charged per 40 foot container topped $3,000 late last year, up from about $2,000 just a few months earlier,” said Nilesh Tiwary, manager of specialist shipping consultancy Drewry Maritime Financial Research. “That should last at least through the end of the first quarter but likely well beyond, especially if the global economy begins to pick up pace as the COVID vaccine becomes more widely distributed and normal economic conditions resume.
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