Frontline is up 146% this year-and probably has more room to run.
Frontline is one of the world's biggest seaborne shippers of crude oil and refined products, and has both U.S.- and Oslo-listed shares. You can already guess why the stock is up so much, but the eye-popping figure cited above actually understates the returns, given that the stock also pays a chunky quarterly dividend and recently declared a special dividend as well.
Frontline runs a massive fleet, including 37 Very Large Crude Carriers, or VLCCs. As oil prices have risen this year and oil tanking routes have been shuttered, the Baltic Dirty Tanker index, which measures the cost of shipping unrefined crude oil, has nearly tripled, and is now significantly above its late-March highs.
While this is obviously great news for Frontline, the company has also shown admirable discipline. The company's CEO recently commented that "Frontline remains focused on capturing near-term value for our shareholders," and its actions reflect that. In fact, the special dividend comes from the proceeds of selling two VLCCs at high current prices.
Wall Street has turned more cautious on the stock as it's rallied. While 93% of analysts rated Frontline "Buy" or "Overweight" a year ago, now only 47% do, with 40% rating it "Hold." That makes sense-at this point, the company practically defies analysis.
"There are so many unprecedented factors driving tanker utilization and rates today and so many headlines that pivot in tone and sentiment daily that creating a near-term trading thesis for this notoriously volatile sector seems to be a fools' errand," Evercore ISI analyst Jonathan Chappell wrote in late July. He said that while he doesn't know when the Iran conflict will end, he does see substantial downside risk. The rise in oil prices and tanker costs is "not supported by true fundamental factors," and yet investors have turned outrageously bullish, "which is likely to only exacerbate the reversion risk that is only a matter of when, not if," he explained.
Like Chappell, we feel unqualified to make a bold call on when the Iran conflict, and the attendant disruptions to the Strait of Hormuz and the Red Sea, will abate. But amid the geopolitical mess, Frontline's role is becoming increasingly important, and the fact that it's quadrupled its gross income in the past year reflects that. At 8.3 times forward earnings, the stock looks outrageously cheap, but in fact it is probably pricing in an appropriate discount to these absurd profits.
Is peace around the corner? It's possible. But if that isn't your prediction-and even if it is, but you want a hedge in case you're wrong-Frontline looks like a smart buy.
Even at these lofty levels.
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