BOAT: Shipping Stocks Are A Momentum Buy

seekingalpha05-17

Shipping stocks have underperformed the S&P 500 in the past decade but have outperformed the market year-to-date.The SonicShares Global Shipping ETF is a globally diversified ETF with equal exposure ...

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Moeller-Maersk A/S"},"translate_title":"船：航运股是一种动力买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AMKBY":1,"XLI":1,"TTM":1,"SPY":1,"RSPN":1,"QSD.SI":1,"PSCI":1,"FRO":1,"COST":1,"BOAT":1,"FDN":0.9,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,".SPX":0.6,"IVV":0.6,"ESmain":0.6},"content_text":"Shipping stocks have underperformed the S&P 500 in the past decade but have outperformed the market year-to-date.The SonicShares Global Shipping ETF is a globally diversified ETF with equal exposure to container and energy shipping, and it has a modified cap-weighted structure.Shipping stocks typically have low but volatile profits, meaning that the best point to take a position is when they are cheap and distressed.BOAT's value proposition has been weakened by strong momentum over the last year, but the momentum itself is a good reason to take a position.The lagging performances of larger-cap shipping stocks gives BOAT more room to run for now.Art Wager Over the past decade, shipping stocks as represented by the Dow Jones Maritime Transport Index have underperformed the S&P 500 by about 60%, but year-to-date, they have outperformed the market by about 30%. This article reviews the SonicShares Global Shipping ETF (NYSEARCA:BOAT) through the lenses of value, quality, momentum/trend, and diversification to assess its potential fit in a portfolio. In the end, I will conclude that although BOAT started off as a good value buy in 2022 and 2023, it is now primarily a momentum buy and should be treated as such. Below, I will briefly discuss the composition of the BOAT ETF, then move on to an examination of its performance and value, and finally argue that anybody thinking of entering into the position at this point should probably only do so as a momentum trade or as a way of adding long-term portfolio diversification in a richly-priced market. I currently own five shipping stocks, CMRE, SB, PSHG, SHIP, and GLBS, two of which (CMRE and SB) are held in BOAT (comprising around 2% of the ETF's holdings). A Global Shipping ETF According to the SonicShares Fact Sheet, BOAT \"consists of global shipping companies engaged in the maritime transportation of goods and raw materials, including consumer and industrial products, vehicles, dry bulk, crude oil and liquefied natural gas.\" It tracks the Solactive Global Shipping Index, which appears to have a higher concentration of global shipping stocks and container shipping stocks than the Dow Jones Maritime Transport Index has. Chart A. The BOAT ETF is evenly divided between containers and commodities. (Solactive) US shipping stocks seem to have a greater concentration in commodity transportation. Thus, one has to be cautious about comparing the Dow Jones Maritime Transportation Index and BOAT, but the former has the advantage of having 25 years of price data whereas BOAT has only existed for a little less than three years. Over that time, they have more or less tracked one another, oscillating within 15 percentage points of one another, as shown in the price ratio below. Chart B. BOAT and the Dow Jones Marine Transport have more or less tracked each other over the last three years. (StockCharts.com) BOAT has largely underperformed the US index by about 20% year-to-date, meaning that it has only outperformed SPY by about 10% this year. To the best of my knowledge, the Dow Jones Indices are cap-weighted whereas BOAT has a modified cap-weighted structure, as it puts an upper limit on the weighting of the top eight stocks. More detail on BOAT's weighting system can be found in the index guidelines. The top 14 of the 47 holdings make up 60% of the ETF.   BOAT Holdings Stock Ticker Percentage Of Net Assets   SITC International Holdings Co Ltd 1308 HK 6.49% 6.49%   ORIENT OVERSEAS INTL 316 HK 5.48% 11.97%   Frontline plc FRO 5.24% 17.21%   COSCO SHIPPING Holdings Co Ltd 1919 HK 5.17% 22.38%   Kawasaki Kisen Kaisha Ltd 9107 JP 5.00% 27.38%   Mitsui OSK Lines Ltd 9104 JP 4.62% 32.00%   Scorpio Tankers Inc. STNG 4.51% 36.51%   HMM Co Ltd 011200 KS 4.44% 40.95%   International Seaways, Inc. INSW 4.28% 45.23%   Matson, Inc. MATX 3.86% 49.09%   AP Moller - Maersk A/S MAERSKB DC 3.77% 52.86%   Golden Ocean Group Ltd GOGL NO 2.76% 55.62%   Star Bulk Carriers Corp. SBLK 2.76% 58.38%   Stolt-Nielsen Ltd SNI NO 2.59% 60.97%   Click to enlarge By currency weight, the fund is about evenly split between Asia (most notably Hong Kong), the US, and Europe. Chart C. The ETF is split between Asia, the US, and Europe. (Solactive) The top 60% have market caps in the USD$3b -$7b range, so this is a primarily midcap fund. So, in sum, this is a globally diversified ETF with roughly equal exposure to container and energy shipping. Value Depending on the classification criteria, shipping stocks are typically regarded as primarily or entirely industrial in nature, with energy-shipping stocks sometimes classified as being part of the energy sector. Seeking Alpha, for example, breaks the fund down 75% industrials and 25% energy, give or take a few points. Chart D. BOAT is primarily an industrials ETF. (Seeking Alpha) Both of these sectors tend to be primarily value-oriented. One would generally expect to find low P/Es and price-to-book ratios here, and indeed that is the case with shipping stocks. I have taken the top 30 holdings of BOAT (at least the top 30 for which I could find US-listed equivalents), comprising over 80% of the fund, and calculated the cap-weighted and equal-weighted earnings yield (the inverse of the PE), acquirer's yield (EBIT/TEV), and book-to-market ratio (the inverse of the price-to-book ratio) for that cohort. The goal is less to come up with precise values than to get some notion of where these stocks lie in the value/growth universe. To be clear: this does not represent the performance of BOAT over this period but rather a sampling of BOAT's current holdings and then a projection into the past of those stocks' performances, just to get an idea of how they may have behaved in the past. The following chart shows an estimate of operating income to total enterprise value (EBIT/TEV). The median value is in orange while the blue line shows a cap-weighted value for all the 30 stocks included. The sharply lower figure in the blue line suggests that the larger-cap components have a much lower EBIT/TEV ratio. Chart E. EBIT/TEV ratios have fallen, particularly in the large caps. (QuickFS.net; Author calculations) This seems to be driven almost entirely by A.P. Møller - Mærsk A/S (OTCPK:AMKBY); the median value is probably more reliable. Chart F. BOAT's EBIT/TEV has been driven down by Maersk. (YCharts) Thus, the EBIT/TEV yield would be roughly 7.5% or an enterprise multiple of 12x. The following chart shows various earnings yield calculations for the 30 shipping stocks. Chart G. The earnings yield on select shipping stocks looks somewhat attractive. (QuickFS.net; Author calculations) Unsurprisingly for industrial and energy stocks, they tend to be quite cyclical. The yellow line shows the earnings yield calculated by weight for any of the stocks at the time for which there was information. As of 2015, there was only data for 15 of the 30 stocks. In any case, most of these numbers are in line with one another, so the yield is somewhere in the 8-10% range, suggesting a P/E of 10 to 12.5, roughly one-third to one-half of the S&P 500's 20+ multiple. The following chart shows a cyclically-adjusted earnings yield, in this case, an eight-year median average of earnings divided by price. The cap-weighted yellow line shows a sharp jump with the inclusion of AMKBY in 2019, but otherwise the numbers are in agreement. The cyclically-adjusted yield is around 2-3%, a roughly 33-50x PE multiple. Chart H. The cyclically-adjusted earnings yield on shipping stocks suggests that they are more expensive than they appear. (QuickFS.net; Author calculations) That would be above Shiller's P/E10, currently in the low 30s, making shipping stocks look more like growth stocks. This is a little surprising since the pandemic brought a massive jump in shipping margins, as seen below. Chart I. Net income margins have fallen dramatically since 2022. (QuickFS.net; Author calculations) This was on top of a surge in the revenue cycle associated with the pandemic. This seems to have benefitted the large caps (as evidenced by the yellow and blue lines in 2021), but since then, they have apparently suffered a significant decline in revenues. The following chart calculates revenue cycles as the log change of quarterly revenue relative to a three-year average. Chart J. Revenue growth has crashed, especially among large-cap shipping stocks. (QuickFS.net; Author calculations) This has been playing out across many of the large shippers. Chart K. Large-cap revenues and profits have returned to pre-pandemic levels. (YCharts) In Tudor Invest Holdings' prescient sell call in 2023, they argued that reduced demand for Chinese goods and a glut in new ships would drive down performance. In the most recent Q1 earnings call, Maersk argued that revenue is growing year-on-year but that the Red Sea issues and ground transportation woes are slowing performance. For this analysis, however, the thing that matters is that shipping stocks have a hard time making a profit. Covid provided a respite, but this has not yet resulted in the kind of sustained profit boom that was experienced in the 2000s. Chart L. Shipping stocks' EPS has hardly grown in past decade and a half. (QuickFS.net; Author calculations) Thus, the cyclically-adjusted earnings yield looks much poorer than the earnings yield (TTM) or EBIT/EV look. The final value metric to look at book-to-market. Chart M. Book/Market ratios are 1, but have fallen substantially in recent months. (QuickFS.net; Author calculations) Depending on whether one emphasizes the median or value-weighted metrics, the book-to-market ratio is somewhere in the 0.6-1.0 range (or a price/book ratio of 1 to 1.6), which is certainly much higher than the S&P 500's (approximately 0.25), but it is a little low relative to the levels of the last 15 years, especially in the equal-weight component. The larger-capped components look more reasonable. As shown in the following chart, Maersk's P/B ratio is 0.5. Others range from 0.9 to 1.5. Chart N. Price/Book ratios are relatively low for large-cap shippers. (YCharts) It is in the smaller, less-recognizable names like Frontline plc (FRO) that P/B ratios have been jumping, as can be seen in the following chart. Chart O. Price/Book ratios for smaller shippers are high. (YCharts) In short, shipping stocks are much cheaper on a P/B metric relative to the S&P 500, but the smaller stocks have seen their valuations move up in the last nine months. Other, mostly larger stocks still have some room to run: AMBKY, OTCPK:CICOY, CMRE, GSL, OTCPK:HPGLY, MATX, OTCPK:OROVY, OTCPK:SITIY, SBLK. Overall, however, I think the time to pick up an industry-wide bargain probably passed in late 2023. The following chart shows a metric I have created to track distressed industries, particularly the grey line. When it hits 1, the industry as a whole is a potential buy due to extreme distress conditions. That metric last peaked in June 2023. Chart P. Distress scores for shippers, 2007-2024 (QuickFS.net; Author calculations) This coincided with the bottom for many shipping stocks, and others have started to catch up, further propelling the BOAT ETF higher. Chart Q. June 2023 was the last major dip in shipping stock prices. (YCharts) Thus, shippers are mostly 'cheap' relative to the market, but the discounts that were available last year have mostly disappeared. But, discounts are not the only reason to buy something. Quality Quality, in this context, refers to profitability, stability of profit growth, debt levels, share issuance rates, and competitive advantage. Much of this is a simplified adaptation of Pulak Prasad's quality screen. We can begin with the competitive advantage of the industry, which is well-nigh unassailable. It is hard to imagine a world in which maritime transport will be seriously threatened by some alternative industrial or transportation system, although it is clear it can be disrupted by local and global events. There will always be a need for shippers. Let's turn to profitability then. The following chart shows aggregated returns on capital employed, or ROCE, using various methods of calculation. This one includes the top quartile of ROCE values among the tracked stocks extant at any given time (in grey). Prasad sets the bar at an arbitrary 20%. Unsurprisingly, based on the exploration of the value factor above, profitability is typically low in the industry, with occasional bursts during commodity booms. Chart R. Shipping returns on capital employed are volatile and low. (QuickFS.net; Author calculations) The following chart shows long-term rates of growth in gross profits. Chart S. Long-term growth rates are also volatile. (QuickFS.net; Author calculations) Obviously, this is an unstable number. Next is the equity/asset ratios. Prasad argues it should be close to 1.0, but as is often the case with cyclicals, the equity tends to be roughly equal to debt. Chart T. Shippers tend to have a lot of debt. (QuickFS.net; Author calculations) It is quite unfair to shipping stocks, but to give an idea of what we might be looking for in quality, compare Hapag-Lloyd with Costco Wholesale Corporation (COST). Chart U. Comparing shipping stocks with Costco highlights their individual lack of robustness. (QuickFS.net; Author calculations) Costco has a high and stable ROCE; Costco is actually less indebted than Hapag-Lloyd; Costco's share number is relatively stable; and Costco's gross profit/asset ratio is over four times larger (0.465 vs. 0.109 for Hapag-Lloyd). The current median average for these 30 stocks is currently 0.13, as can be seen in the following chart. Chart V. Shippers typically have woeful profitability metrics. (QuickFS.net; Author calculations) In sum, volatility, and low profitability means that shippers are unlikely to score high on metrics of persistent quality. The opportunity in the space typically lies either in value or momentum. Momentum Historically, momentum has been a relatively cheap and easy way of adding to portfolio performance if practiced systematically. Although everyone has their preferred metric, in this case, a simple 12-month return suffices to illustrate BOAT's momentum. The following chart shows BOAT's 12-month return (in red) relative to large-cap (XLI), equal-weighted large-cap (RSPN), and cap-weighted small-cap industrials (PSCI), as well as the S&P 500 (SPY). Chart W. Shippers have been outperforming fellow industrials and the broader market. (StockCharts.com) It has strong relative momentum and is obviously well above almost any trend lines (in this case, the chart shows a 200-day trend line). If one's portfolio is in need of momentum, and one is willing to practice it in a systematic way, BOAT is one fund that fits the bill for now. Diversification One other reason to consider an asset is its ability to add stability to a market portfolio. Shippers appear to have this quality in one respect. In the following chart, I show the return for the Dow Jones US Marine Transportation Index (DJUSMT) in red and the SPY in blue. Below that is the DJUSMT/SPY ratio. Marine Transportation outperformed the SPY primarily during the post-dot-com bear market of the 2000s. During the cyclical bear markets, however, shipping stocks underperform. Chart X. Shipping stocks outperform during secular bear markets, but underperform during cyclical bear markets. (StockCharts.com) As the four panels at the bottom of the chart show, shipping stocks tend to be positively correlated with SPY, commodity indexes (GNX), and interest rates (TNX). Plus, they are negatively correlated with the US dollar. In other words, somewhat like long-term TIPS and other cyclical stocks and commodities, most of their diversification benefits come during long-term bear markets, not the cyclical shocks like 2008 and 2020. Summary & Final Thoughts Shipping stocks are, for the most part, 'cheap' relative to the wider market, and particularly the high-flying tech stocks. But, the distressed conditions that helped provide some margin of safety have largely evaporated, at least at the index level. Since the middle of last year, many of these stocks have surged and now have extremely strong momentum. This is partly reflected in the Seeking Alpha quant grades, especially the momentum score that has improved significantly in the last six months. Momentum has pushed the Quant rating from a 'strong sell' in early April to a 'hold' now. Chart Y. Quant scores are intended to incorporate all possible information. (Seeking Alpha) This quant system uses a blend of the factors tracked to calculate this overall score. I am using a different approach, which I have described elsewhere. This essentially determines whether or not a given asset can fit a portfolio niche by fulfilling at least two of five metrics (simplified to four in this article): value, quality, momentum, trend, and diversification. An 'A' in diversification and quality will typically be enough to score an 'A' overall, even if the valuation is high, relative strength is poor, and the trend is negative. In this instance, the primary qualities on display in shipping are now momentum, trend, and diversification. For me, diversification typically pairs best with quality, particularly over the long term, but shippers typically lack the quality metrics described earlier. Thus, it is the strong trend and relative strength that stand out and make for a good excuse to take a tactical position to boost portfolio performance. For those who bought shipping stocks at the discounted stage a year ago, this is a 'hold', so long as a modicum of momentum can be maintained. Once the trend or relative strength fails, it will probably be best to exit or reduce one's exposure to the shipping space. Conclusion There is a difference between executing a momentum strategy and 'chasing returns,' although the two are often conflated. Last year, shipping stocks were available at a discount and, as is so often the case, this seems to have helped propel them to outperform the market over the last year. The case for BOAT and the shipping industry stocks has shifted, therefore, from value to momentum, especially for those who are thinking of finally stepping in. But, if BOAT is bought on momentum, it should be sold on momentum as well. I have positions in five shipping stocks, as alluded to above, and I also have another 11% or so in large-cap and small-cap industrial ETFs, so I am unlikely to take a position in BOAT at this time, but I believe that there is a compelling case to be made for it. Stockcharts  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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