I am not suggesting this as an investment for YOU, but seek out disconnects like this. Despite rising earnings, the market may be worried about lower oil prices because lower oil prices may affect the demand for the products that NVGS ships and/or the capex that NVGS is bearing with delivery of new ships. The question for an investor would be: “Has the market over-discounted the fears of low oil prices or over-supply of ships?” This company is VERY different than a standard dry-bulk shipper. These are highly-specialized/expensive ships. Knowledge reduces risk, so really understand the management and its goals.
From 1975-2001: ROI for T-Bills was 6.6%, S&P 500 14.1% with a 15% std. dev., Bulk Shipping 7.2 with a 40% std. dev., and Tanker Shipping 4.9% with a 70.4% std. dev! (Source: Maritime Economics, 3rd Edition)
Who in their right mind would invest in the shipping business? Well, if you can buy low, then fortunes can be made. Recently, the Baltic Dry Index (BDI) hit a thirty-year low of 291, BDI Index and note the long-term chart below. Always look at MANY years of past data. The boom of 2007/08 will probably not be seen again for many years.
“Dry bulk is a screaming buy; one of the best entry points in the cycle in the last thirty years. But be prepared to sustain a prolonged period of poor freight market conditions and have plenty of cash reserves and low leverage. In other words, you have to have a longer-term perspective than most investors–three to five years at least.
Isaac sowed seeds into the land during a drought. –Leon Patitasas
“That’s the funny thing about ships. They are actually more attractive to buy at 20xs EBITDA, or even negative cash flow, than they are at 4xs EBITDA,” Coco said.
“So you are telling me that investors should seek out money losing shipping deals?” she asked incredulously.
“Correct. And sell the ones that are making lots of money. Itis like that little Napoleon said….”Buy on the sound of cannons and sell on the soundsof trumpets.” (Source: The Shipping Man by Matthew McCleery).
John Chew: Here is where I wonder if this post helps readers’ understanding of investing because is this investing or speculating? Note as much as what Warren Buffett does NOT do. He doesn’t invest in mining or shipping stocks. He has already had poor results with the airline industry. So why even mention an industry in massive distress with historically sub par returns and huge volatility? I would prefer businesses with great reinvestment opportunities or great capital allocators at the helm like Markel (MKL), but a horrific business going from a distress price to a bad price may give much better returns depending upon the price paid. Also, the worst bear market in freight rates in the past 30 years for dry bulkers means unusual opportunity just as the worst bear market in gold miners in the past 100 years offered bargains galore.
Readers know that I ventured into the miners in mid-to-late 2013, subsequently suffering back-to-back declines of about 25% before seeing the portfolio rally about 100%. So I still do not have a great return (12% after three years), but I bought miners with a five-year-to-seven year outlook and I am only three years into the investment. With Junior miners you can expect to see a 50% decline before they rally five to 10 times (assuming you chose the ones that survive! –Rick Rule). In a land of negative-to-low interest rates, I have to look further for bargains.
Readers can pipe in what they would like to learn in future posts–let me know.
Five years of declines in gold mining stocks and then…..
Are you investing or speculating by dry-bulk shipping stocks? These are stub stocks where the equity is a small fraction of the enterprise values due to the shrunken market cap and the large debt taken on to finance ship purchases. But if you buy a few well-managed and relatively well-financed shipping companies that can survive the trough of the cycle–two to four more years?– you can tolerate a few going to zero if the ones remaining multiply many-fold. Not for the weak-kneed. Scorpio Bulkers (SALT) has ALREADY diluted shareholders and has taken drastic action to survive. Note management buying shares at $3.00 Scorpio Bulkers Inc. Announces Financial Results for the First Quarter of 2016. An ugly past, but we invest for the future in terms of mean reversion. I have not yet invested in any shipping stocks!
Here is what I love about the shipping business. 10 ships and 11 cargoes, then a BOOM. 11 ships and 10 cargoes, then a BUST. You are also on the SAME footing as the most experienced ship owners in the world. NO ONE knows when the cycle will turn. This is like a poker game where the investor that has the ships when others have thrown in the towel takes a lot of the marbles. The worse the freight rates and the outlook, the better IF you can carry the costs until the cycle turns, and it WILL turn due to the laws of supply and demand.
I view this as intelligent speculation. I allocate five tranches of investment into five shipping companies. Say $5 units each. One unit goes to zero (ouch!), the next to $2 (Boo!), the next to $1 (Damn!), the next to $3 and the next to $50 (Homerun!) and it takes three years. There is a 31% compouned return. Though I have no idea if this is realistic because I must study the shipping industry thoroughly. I am just formulating a possible strategy IF I find the right companies at the right prices. But I am drawn to the shipping companies because some companies are trading below depressed net asset values. As Mr. Templeton suggests, look where the outlook is most dire.
Novagold Annual Report 2015 This annual report’s shareholder letter including the links provides an excellent example of how several investors view the capital cycle for an asset. History does provides a guide.
The above article should be a sobering reminder of how difficult it is to choose exceptional stocks. Remember when reading about great compounding machines like Wal-Mart in its early days (1970 to 1999) that you must take into account survivorship and hindsight bias.
From his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15, which was released in hardcover today (Dec. 2015):
Typically, capital is attracted into high-return businesses and leaves when returns fall below the cost of capital. This process is not static, but cyclical – there is constant flux. The inflow of capital leads to new investment, which over time increases capacity in the sector and eventually pushes down returns. Conversely, when returns are low, capital exits and capacity is reduced; over time, then, profitability recovers. From the perspective of the wider economy, this cycle resembles Schumpeter’s process of “creative destruction” – as the function of the bust, which follows the boom, is to clear away the misallocation of capital that has occurred during the upswing.
The key to the “capital cycle” approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side. In his book, Competitive Advantage, Professor Michael Porter of the Harvard Business School writes that the “essence of formulating competitive strategy is relating a company to its environment.” Porter famously described the “five forces” which impact on a firm’s competitive advantage: the bargaining power of suppliers and of buyers, the threat of substitution, the degree of rivalry among existing firms and the threat of new entrants. Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.
“Bull markets are born on pessimism,” he declared, they“grow on skepticism, mature on optimism, and die on euphoria.” –John Templeton
John Templeton paid attention to the emotion of the stock market. The first half of his philosophy was “The time of maximum pessimism is the best time to buy.” When everyone else was selling, he bought low during the Depression and in 1939 at the onset of World War II . . . and he made millions.
The second half of his philosophy was “the time of maximum optimism is the best time to sell.” He sold high during the Dot.com boom when everyone else was still buying. Founded in the 1950s, his Templeton Growth Fund averaged 13.8% annual returns between 1954 and 2004, consistently beating the S&P 500.
I think there are a few ways to make many times (10x to 100x +) your money over a long period of time. The first would be to own emerging growth companies that have owner-operators who are both excellent operators and capital allocators who grow the company profitably at a high rate over decades. The business generates high returns on capital while being able to deploy capital into further growth. Think of owning Wal-Mart in the early 1970s or Amazon after its IPO or 2001. There will be a post on 100 to 1 baggers soon. I prefer this approach.
The second way would be to buy distressed assets and then improve those assets or create efficiencies by creating economies of scale. Carlos Slim, Mexican Billionaire, would be an example of this type of investor. Think activist investing. Note that Carlos Slim has operated at times as a monopolist in a government protected market. Most of us do not have his options.
The third way would be to buy deeply-distressed, out of favor, cyclical assets and then resell upon the top of the next cycle. Gold mining is a difficult, boom/bust business, for example–see Barrons Gold Mining Index below. All businesses are somewhat cyclical, but commodity producers are hugely cyclical with long multi-year cycles due to the nature of mining-it takes years and high expense to reopen a mine and even if I gave you $2 billion and several years, you and your expert team may not be able to find an economic deposit. Note the five-to-ten year cycles below.
We are focusing on the third way, but in no way do I suggest that this is for you. You need to be your own judge. There is a big catch in this approach, you need to choose quality assets and/or companies with managements that do not over-leverage their firms during good times or overpay for acquisitions during the booms (or you could choose leveraged firms but be aware of the added risk and size accordingly becasue when a turn occurs, the leveraged firms rise the most). You also need to seek out a period of MAXIMUM pessimism which is difficult to do. How do you know that the market has FULLY discounted the bad news? Finally, YOU must be prepared to invest with a five-to-ten year horizon while expecting declines of over 50%. That concept alone will make you unique. Probably most will turn away from such requirements.
We last studied Dave Iben, a global contrarian investor, in this post: http://csinvesting.org/tag/david-iben/. You should read, Its Still Rock and Roll To Me at http://kopernikglobal.com/content/news-viewsand listen to the last few conference calls at the right side of the web-page. Note Mr. Iben’s philosophy, approach, and Holdings. His portfolio is vastly different than most money managers or indexers. But being an contrarian takes fortitude and patience. Kopernik Global performance since inception:
Next preview the readings below.
First you need to understand Austrian Business Cycle Theoryto grasp how massive mal-investment occurs. Why does China have newly built ghost cities? Distortion of interest rates causes mal-investment (the boom) then the inevitable correction because the boom was not financed out of real savings.
Why is the bust so severe for mining/commodity producers? Read Skousen’s book on the structure of production. Think of a swing fifty feet off the ground and 200 feet long. If you are sitting near the center of the swing’s fulcrum (nearest the consumer), then the ups and downs are much less than being on the end of the swing furthest from the consumer (the miners and commodity producers).
Then Throwing in the towel on Vale. I am not picking on Prof. Damordaran because we all make mistakes, and he graciously has provided a case study for us. Study the posts and the comments.
Can you think of several research errors he made (BEFORE) he invested?
Remember in the prior post, the long-term chart of the CRB index showing commodities at 41-year lows since the CRB Index is below 175 or back to 1975 prices? Then why, if gold is a commodity, doesn’t gold trade at $200 or at least down to $500 to $700 as the gold chart from that time shows?
Why, if gold is money, doesn’t gold trade in US Dollars at $15,000 or the estimated price to back US Dollars by 100% in gold? You can change the amount to $10,000 or $20,000, but you get the idea.
Try thinking through those questions. Can we use what we learned from gold to value oil?
I will continue with Part III once readers have had several days to digest the readings and at least three readers try to answer at least one question. Until then……………………….be a contrarian not contrary.
At lows, commodity price narrative is pure supply and demand with LIMITLESS SUPPLY (oil) and anemic demand (China slowdown) while at highs the narrative for commodities is driven by financial speculation (China boom/Commodity Super Cycle). Buy low and sell high.
Climbers say that when you are over 24,000 feet, you enter the “Death Zone. Mistakes become lethal.
The death zone is the name used by mountain climbers for high altitude where there is not enough oxygen for humans to breathe. This is usually above 8,000 metres (26,247 feet). Most of the 200+ climbers who have died on Mount Everest have died in the death zone. Due to the inverse relationship of air pressure to altitude, at the top of Mount Everest the average person takes in about 30% of the oxygen in the air that he or she would take in at sea level; a human used to breathing air at sea level could only be there for a few minutes before they became unconscious. Most climbers have to carry oxygen bottles to be able to reach the top. Visitors become weak and have inability to think straight and struggle making decisions, especially under stress. WIKI
So what does this have to do with investing? When you pay too much for growth or quality, you may never recover. VALUATIONS MATTER ALWAYS!
First review the Nifty-Fifty Era when fifty stocks were “must own” for institutions in the 1970s due to their growth and quality. Money managers herded into them similar to this: Money Managers Herding Video.
Now think about how the pattern repeated in the Internet years of 1996 to 2000 when MSFT and INTC were the must own stocks of their era.
Congratulations! If you bought back in 1999/2000 when the press was lauding these “must own” stock for the future, you are now in the black.
Even if you pay too much for stable, high quality companies, you can lose even as the companies grow sales, cash flows and earnings year after year after year. Note: KO_VL_Jan 2013 (See P/E ratio as a proxy for investor enthusiasm and compare to financial metrics). What is not to like? So why did the price go sideways for almost a decade after 1998? Investors adjusted their expectations.
Sun MicroSystems Case Study
One thing to never forget is that the market is mostly efficient but not ALWAYS efficient or correct. 2 plus 2 equals 4 not 10. The last Internet frenzy gives a perfect case study in Sun Microsystems (SUN).
Sun Microsystems has always intrigued me. For a number of years, it seemed as if the company could do no wrong. During the early 1990′s, Sun occupied the top position in high performance computer workstations, a category of computing that has since virtually disappeared thanks to advances in PC hardware. Despite desperate attempts to unseat it from its leadership position by worthy competitors like HP, DEC, and IBM, Sun was able to prevail.
If you had purchased Sun stock in May of 1994, you’d have seen it skyrocket to nearly 100 times its value by August of 2000, just 6 years later. Had you kept it at the historical high price of $253/share, you’d have seen your investment lose more than 98% of its value when it came back down to just $3.17 a share by October 2008.
SUNW/JAVA stock price meteoric 100x rise and fall
It is easy to pull out a historical chart and say, “Look at the bubble popping.” But note what the CEO had to say about the price of his company’s stock in 2002:
Q: Sun’s stock hit a high of $64 or adjusted in the chart above of $250. Did you think what tech stocks were doing two years ago was too good to be true? (Date of the interview was March 2002).
A: No, she trained me well, and the stock made a nice move since we got married. But two years ago (2000) we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
Now, the same music is playing but the players have changed.
Are now driving the performance of the general stock indexes:
The Fab Five are “NEED TO OWN” stocks for money managers who wish to NOT underperform in the short-term.
GE_VL certainly the the financial metrics, growth, and rising stocks prices make these easy “one-decision” stocks.
Let’s take AMZN because this company has a dominant position in retail that seems to be growing.
Amazon Key Stats
Trailing PE: 950.63
Forward PE: 117.65
Market Cap: $311.04 billion
Book Value: $26.50 per share
Share Price: $663.54
Read more at How Amazons Long Game Yielded a Retail Juggernaut. Can’t you see many Americans becoming addicted to Amazon’s Prime service? Poor Wal-Mart and other retailers. However, IFAMZN doubles in market cap over the next 10yrs or a 7% annual return, and ends up trading at 21.9x earnings (current SPX p/e) in 2025, it needs to grow net income 55%/yr! Since 1973, 0.28% of companies have grown earnings at 55% for 10 years (Source: O’Shaughnessy). Do you like those odds? Or are you so smart that you can tell that AMZN will win the lottery?
While valuation augur for CAUTION for stocks IN GENERAL: