With U.S. indices hovering near all-time highs but grappling with rising volatility and uncertainty, some investors are seeking potential safe harbors. They're on the lookout for value investments that could offer protection amid increasing market fluctuations.
A closer look at Howard Marks’ portfolio—specifically his significant position in Torm (ticker: TRMD). This stock represents about a quarter of the $5 billion-plus public equities portfolio managed by Oaktree Capital.
For those unfamiliar, Howard Marks is a co-founder of Oaktree Capital, a firm renowned for its deep-value investing philosophy. This strategy isn’t about chasing hyper-growth; instead, it's focused on acquiring assets significantly undervalued, often at 50 cents on the dollar, with the expectation they’ll appreciate to full value over time. Sometimes, this approach involves complex restructurings, such as buying bonds to effectively acquire assets for 10-20 cents on the dollar—a method that has historically driven Oaktree’s impressive returns.
Torm, which operates a fleet of around 100 tankers worldwide, caught my attention, particularly after its stock price declined by roughly 50% over the past six months. The company currently trades at just 2x price-to-earnings (P/E) and offers a staggering 30% dividend yield. But the pressing questions remain: Is this dividend sustainable? And what’s driving Oaktree’s conviction in Torm?
Understanding Torm's Business Model
Torm operates long-range and medium-range vessels that transport refined oil products and chemicals globally. The company boasts a history spanning more than 100 years and is listed on the Copenhagen Stock Exchange. Oaktree has been involved with Torm for about a decade, having entered through a restructuring deal that gave them a majority stake after investing in the company’s bonds. Although Oaktree has reduced its holding slightly, it still owns about 40% of Torm, aligning its interests with minority shareholders.
Shipping Dynamics and Geopolitical Factors
Torm’s fortunes are closely tied to spot market rates for tanker leases, influenced by global shipping demand, geopolitical events, and supply of vessels. Recent sanctions on Russia, for example, have led to longer shipping routes, boosting demand for tankers. Similarly, threats from Houthi militants have diverted shipping away from the Red Sea to longer routes around the Cape of Good Hope, further supporting higher shipping rates.
However, these dynamics are volatile. Analysts have noted that shipping rates hit 2024 lows in December, with long-range (LR2) spot rates declining from $40,000 to $25,000, a 50% drop. Medium-range rates have also fallen by over 30%. These lower rates are expected to affect Torm’s earnings in the coming quarters, as the company’s revenues are highly sensitive to spot market fluctuations.
Investment Considerations
While Torm’s valuation appears compelling—trading at about half its net asset value (NAV) of $35 per share—the business remains a "price taker" in a cyclical industry. The company’s cash flows can swing dramatically based on shipping rates, which is a risk inherent to commodity-based businesses. For instance, during the 2021 recession, EBITDA was around $140 million, compared to $850 million during peak shipping rate periods.
For deep-value investors like Oaktree, Torm’s significant discount to NAV and alignment with management's long-term focus are attractive. However, for those seeking obvious growth, the uncertainty around future shipping rates makes Torm a challenging investment. A potential dividend cut looms if rates remain low, reflecting the unpredictable nature of the shipping industry.
Factors Influencing Valuation
Shipping Rates: Current Spot Rates are significantly lower than the highs seen in 2022-2023. LR2 tanker rates are hovering around $24,000-$25,000 per day, down from $40,000 earlier.Continued geopolitical risks (such as Red Sea disruptions) and sanctions could support shipping rates. However, a global economic slowdown or increased tanker supply could keep rates under pressure.
Dividend Sustainability: Given the high dividend yield, if rates stay suppressed, dividend cuts are a risk. If rates improve, the dividend could remain attractive.
NAV Discount: The stock trades at a substantial discount to NAV (around 50%). If the market reassesses the value of the fleet or if rates improve, this discount could narrow.
The current price of $17 suggests TORM is undervalued, offering potential upside depending on shipping rates, dividends, and market sentiment.
Conclusion
Ultimately, every investor must determine their own strategy. While Torm might appeal to deep-value enthusiasts, my personal preference is for businesses with clear growth trajectories, pricing power, and more predictable earnings. Although Torm checks many boxes—management alignment, compelling valuation—it falls short on the critical criterion of obvious growth potential.
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