Hedge fund Caspian Capital increased its holdings in this shipping company by 288% during the first quarter, and by another 205% during the second quarter. The stock is now the fund’s top holding, at some 14.89 million shares. Analysts have increased their EPS estimates five times in the past 30 days for this stock. Our contributor also recommends taking profits in an insurance company.
Star Bulk Carriers (SBLK)
from The Turnaround Letter
Incorporated in 2006, Star Bulk Carriers (SBLK) became the largest dry bulk shipping company on the U.S. stock market in 2014 when it merged with Oceanbulk Shipping and also acquired ships from bankrupt Excel Maritime. (Dry bulk ships, as the name suggests, transport dry, bulky cargoes such as coal, iron ore and grain.) Star Bulk currently has 70 ships in operation and another 26 on order.
Dry bulk shipping rates rose dramatically in the mid-2000s, spurred by demand from China for coal, iron ore and other dry bulk products. While rates fell in 2008 and early 2009 with the global recession, they began to bounce back later in 2009. However, when rates were at their peak, many shipping companies ordered new ships, and these came on line just as Chinese demand began to soften. This caused dry bulk rates to plummet, and they have remained at historically low levels since early 2012. This has crushed the dry bulk stocks.
Although it is difficult to predict when dry bulk rates will rebound, Star Bulk is well-positioned to profit when they do. The company has a very experienced management team, modern ships with low operating costs, a decent balance sheet and savvy owners.
The top management team has more than 130 years of combined experience in the shipping industry. Over the years they have developed strong relationships with customers and other key players in the industry. In addition, management, led by CEO Petros Pappas, has a significant ownership stake in the company.
Star Bulk’s fleet of ships, which is well-diversified across various size categories, is among the newest in the industry, which reduces operating costs, improves safety and makes the ships more attractive to potential charterers.
The company continues to drive down operating costs, with a 14% reduction in daily vessel operating costs last year and 31% since 2009. Similarly, daily general and administrative expenses have been reduced by 36% since 2010. The balance sheet looks reasonably solid. The company has raised new equity twice in the last few years, and it has firm financing in place for all of its new ship orders.
There are signs that the supply/demand picture in the dry bulk sector may be improving. On the supply side, orders for new ships are down, and older ships are being scrapped at an unprecedented rate. Demand is expected to pick up over the next year or so as low commodity prices drive increased usage around the globe.
On the ownership front, Oaktree Capital, which has a long and distinguished track record as a turnaround investor, owns more than 50% of Star Bulk’s stock, and two other savvy hedge fund groups own another 7%.
Among other things, this should assure transparency and accuracy in Star Bulk’s financial Reporting—not always a given in shipping. All in all, Star Bulk is a good long-term option on a recovery in the dry bulk shipping sector.
The stock price may continue to languish for a while, but it has a lot of upside leverage when shipping rates do eventually rebound. We recommend buying Star Bulk up to 5.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, August 2015