Shipping stocks are up there with the most unwanted stocks in world stock markets as far as fundamental valuations go. The median P/Book ratio of shipping companies listed in the US is a mere 0.785. This is more or less the cheapest P/B valuations that shipping stocks have traded at since the 1970s (sorry our data does not go back prior to 1970). OK the P/B ratio is a rather simplistic way of looking at the valuation of stocks, but shipping companies are rather different animals than many other stocks. Shipping companies have “hard” or physically “observable” assets unlike many other companies (it is much easier to value a hulk of steel floating on the water than it is a brand name, a housing loan, an ore body, or a building etc).
Contrary to popular belief, if you were to have invested in a collection of shipping stocks 6 months ago (more or less at the height of the credit crisis) you would have been at least no worse off than if you had invested in the US stock market itself. Yet since mid January there has been a proliferation of commentary on how global trade continues to deteriorate.
While we may be a few months off calling the relative bottom in shipping stocks we believe that if shipping stocks have not underperformed the market over the medium term (over the last 9 months shipping stocks have performed exactly in line with the Vanguard Total Market Index) then they are highly unlikely to underperform over the next 18 months.
We are probably going to be lambasted for being bulls on shipping stocks, and yes we may well be wrong over the coming weeks. But we are willing to be wrong before we are right. When the outlook for shipping companies improves they will have already increased dramatically. Semantics perhaps but whenever we look at a global sector which has fallen on hard times the words of John Templeton ring loudly in our ears “invest at the point of maximum pessimism”. We doubt that the outlook for shipping companies can get much worse and are confident that this is more or less the point of maximum pessimism for shipping companies in modern times at least.
