Rough Seas Still For Shippers

As part of my search for safe and cheap stocks, I'm usually looking around in distressed/unloved industries. The shipping industry is certainly fits the unloved category right now. There are plenty of low P/E and low P/Book candidate shippers to look at. Check out the chart below which shows two shippers ( picked at random ) and their share performance vs the S&P 500. The industry has been a dismal performer. That's usually a good sign as it's a good place to invest looking forward.

Source: BigCharts.com

One would think that with the world economy improving, the shippers would be a good place to be. In previous cycles, the shippers have been a good place to be, giving investors huge returns. With the Baltic Dry Index ( index that tracks shipping prices of dry goods like grain, ore pellets and coal ) back to 2008-2009 levels, it seems to have little downside left. However, all is not well on the high seas. The outlook for the shippers is murky, which is ok, but it's the potential downside that worries me. During the last boom cycle, the shippers flush with cash, ordered a record number of ships. Those ships are now being delivered. In fact, all those extra ships ( & payments ) combined with low shipping rates and debt laden balance sheets will likely significantly reduce their earnings power going forward. The risk/reward scenario for these stocks isn't in our favour. So for now, we'll let a few more quarters float by - then re-assess.

Bye Bye Talisman (TLM)

I recently sold my position in TLM @ $22 and change. TLM reached my conservative estimate of the company's intrinsic value. While TLM continues to be a well run company lead by John Manzoni, at over 2X book and 18-20X forward earnings it's time to move along. The risk/reward combo has now flipped. There's more downside risk than upside potential. I have used some of the proceeds to add to US financials and another much smaller oil/gas company based in the US that's currently out of favour.

Andre

Time To Add Risk - Hmmm.... Not sure about that

I recently read an article in one of Canada's leading newspapers, suggesting that it's time to add more "risk" to your portfolio. I believe the point the author was trying to make was that it's time to add economically sensitive companies to your portfolio. With the economy getting better that's a good plan - except for the current price of the markets.I think that the average investor who takes this as a green light to jump into the market with both feet may be disappointed. As a died-in-the-wool value investor, I define "risk" as a permanent loss of capital - AKA - losing money. Minimizing "risk" is a function of prices paid for a security, whether it's a stock a bond or a house. So jumping into the market now, with little or no regard to prices paid, could result in a painful permanent loss of capital. With the market up 86% since the "bottom" on March 9, 2009 ( largest rally since 1955, source: Bloomberg ) equity prices are not exactly cheap. Dirt cheap stocks are now much harder to find - so risk levels (prices) are now much HIGHER then the past 18 months, but there are still pockets of value. As I have mentioned in other posts, going forward, I'll continue to sniff around areas like:

- Canadian Life/Property insurers - MFC, FFH
- US Banks - Citi, B of A, Wells Fargo - and some small US thrift banks
- US Business services
- Select North American oil/gas companies - one's that are out of favour due to high gas exposure
- Auto/truck parts
- Large cap US multinationals
- Emerging market industrials

Some of the areas listed above have perked up recently so before I jump in and add "risk" I'll be particularly sensitive to prices paid. After all, a well purchased stock is already half sold.

As an aside, many articles and investment advisors continuously recommend investors own Canadian Banks. I currently see little or no value (except for income only investors) in the Canadian banks. At 2x book and mid teen P/E's, they are definitely not screaming buys. I don't see a huge earnings tailwind to push the Canadian banks higher - at least for now.

Disclosure: Long WFC, BAC, C, MFC, FFH