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2018.03.25 Penn Wealth Report Vol 6 Issue 01

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25 Mar 2018 Penn Wealth rePort voluMe 6 issue 01 9 Penn Wealth RePoRt Copyright 2018. All Rights Reserved. investment intelligence Fear and opportunity The fear that comes after getting burned can open up tremendous opportunities for investors with fortitude and vision. On 20 March 2009, massive US banking firm Bank of America BAC was selling for $2.53 per share, down from $38 per share the previous October—just five months prior. Average investors didn't want anything to do with the stock. Could it have dropped further? Sure. But it was clear at that point that the US government was not going to let it fail. Astute investors swooped in and drove the price up to $15 per share just two months later. Today we look at the carnage that is the publicly-traded shipping industry. Like banking back in 2008/09, we know some companies may fail, but we also know the industry isn't going away; quite the oppo- site. So, the trick is in becoming somewhat of an oracle: putting yourself 30,000 feet up, looking down at a timeline of the indus- try—past, present, and future. Trends The global GDP continues to heat up, and that is certainly good news with respect to the shipment of goods and fuel. Despite trade war talks emanating from D.C., we believe this is simply posturing to get bet- ter trade deals for the US. In other words, while others are selling, we tend to buy. For example, when "the NAFTA rail- road," Kansas City Southern KSU , was getting hammered over discussions of scrapping NAFTA, we were buying. Now, as false nar- ratives of global trade wars circulate the news rooms like flies, dry bulk shippers are getting hit (rolled steel and aluminum are shipped by this method). This is despite the fact that the demand for coal and iron ore is increasing once again. Freight rates have also been increasing in tandem with demand. We are bullish on commodities right now, and higher prices in that sector would be another good sign for the industry. Shippers can raise their spot and time-char- ter prices when bulk suppliers can receive more for their goods. $400 million Greek carrier Diana Shipping (DSX $3-$4-$6), for example, just negotiated a $12,200 per day gross char- ter rate with Glencore Agriculture, a major Dutch-based supplier of farming commod- ities, for its Panamax dry bulk vessel the m/v Calipso. The Calipso had previously been chartered to another company at a gross charter rate of $9,900 per day. In other words, the new contract represents a 23% rate hike for Diana. Diana has a fleet of 50 dry bulk vessels of various sizes, with a combined carrying capacity of 5.8 million dry weight tons. Crude prices, LNG, and M&A On the 20th of December last year, crude shipper Gener8 Maritime (GNRT $4-$6-$7) was selling for $4.27 per share. The next day, Gener8 and Antwerp, Belgium-based Euronav NV (EURN $7-$9-$10) announced their intention to merge, creating the top independent large crude tanker operator. GNRT spiked to $6.94 per share—a 62% spike—within two weeks. Still, the compa- ny's market cap is just $500 million, making it a great potential takeover target. The two trends of increased merger activity and rising oil costs/demand should grease the skids for improved shipper met- rics. Remember that, in addition to crude, liquefied natural gas (LNG) is also shipped aboard these vessels, and the US has a president committed to exporting both of these energy sources. This marks, despite the rhetoric of previous presidents, the first time that the United States has been a real exporter of energy, and this is not going to happen via undersea pipelines (which are prohibitively costly and inefficient). While there may be some dispute over which country has the world's largest natural gas reserves, there is no doubt that America has the most advanced system of extracting those reserves in place right now, and is fully com- mitted to production. Russian President Vladimir Putin has used his natural gas company, Gazprom, as a tool to keep Eastern Europe at his mercy. Recall that a 2008 dispute between Russia and Ukraine led the former to cut off gas supplies to Eastern Europe. This threat re-emerged fol- lowing the Russian annexation of Crimea. Russia currently still supplies half of Europe's natural gas needs via pipeline, but President Trump recently told a cheering crowd in Poland that help is on the way, via LNG-carrying ships coming from US ports. In fact, LNG bunkering facilities are being built at breakneck speed at ports around the world to handle these shipments. These specialized facilities are required to convert natural gas to liquid by cooling the gas to around -260° F, then to convert back to gas through a process known as regasification. Fundamentals and chief players Before mentioning any specific names we like, investors should understand that most of the major players in this industry are currently operating in the red after a pro- tracted downturn. In other words, buying individual names in this segment is not for the faint of heart. One way to diversify away risk would be to buy a basket of shipping stocks. Hands- down, the best option for this basket would be the Guggenheim Shipping ETF, with the appropriate symbol SEA ($11-$11-$13). Not only does it have a current dividend yield of 5.41% (as of the time of this writ- ing), it holds 25 major players across the purpose-built ship spectrum. Top hold- ings include A.P. Moller Maersk, Golar LNG, COSCO Shipping, Seaspan, and Frontline. While the current price of SEA is floating around $11 per share, it was trading for $23 per share before the most recent downturn. Previously-mentioned Diana Shipping is one of our favorite dry-bulk players, and has a high degree of analyst coverage (at least they are willing to make a rating on the firm, which gives some comfort). DSX is currently trading for $3.74 per share, down from the $8 to $12 range it traded in over the 2009- 2016 period. We place the fair value of the stock at around $8 per share. F r o n t l i n e (FRO $4-$5-$7) is a $770 mil- lion liquid bulk shipper which also diversifies into the dry bulk arena. Frontline's stock price surged about 18% last week after receiving a "buy" rating from DNB Markets. The analyst house also upgraded the over- all industry to a "buy" for the first time since spring of 2016. So, what moves have we made? We do believe the industry is in the nascent stages of a cyclical comeback. Despite the inherent risks discussed, we added SEA to the Dynamic Growth Portfolio as a satellite (smaller) position, buying at $11.03/share. Within the higher-risk Intrepid Trading Platform, we picked up Nordic American Tankers (NAT $2-$2-$9) at $2.10/share. Please note that we monitor these posi- tions constantly, and review each client's risk tolerance before investing. As always, consult your financial professional before adding a position. Happy sailing! Photo Courtesy: A.P. Moller Maersk

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