Warren Buffett once summed up his approach to investing as “Be fearful when others are greedy and greedy when others are fearful.”
Great advice, but with bonds plunging on higher rates and stocks bouncing higher as the rest of the market becomes greedy, what is an investor to do? Being fearful means bond losses, but being greedy means leaving yourself open to the next market sell-off.
Maybe what the Oracle of Omaha should have said was, “Be fearful in sectors where others are greedy and greedy where others are fearful.”
Of all the sectors to feel the weight of the Great Recession, shipping may have been the hardest hit. Global trade plummeted 23% in 2009 for a loss of $3.8 trillion in import value, the biggest one-year drop on record.
Trade bounced briefly but fell again last year as weak global growth held back exports. Unlike the rest of the market, which has fought through concerns of sluggish global growth to post returns of 15% since the beginning of the year, global shipping has been falling like a rock since February and is down double digits.
Global merchandise exports have grown by an annualized rate of 7.7% since 1990, according to the World Trade Organization, with the average increasing to 10% over the past decade.
In fact, trade growth has been negative in only four years out of the past three decades. If others are fearful for stocks of shipping companies, I’m going to be greedy.
Stronger Trade And Higher Prices Ahead
Real GDP in the 17 economies of the eurozone grew by a 1.2% annualized rate in the second quarter after six consecutive quarterly declines. Even better for shipping companies is that real exports of goods and services exploded higher at a 6.8% annualized rate.
A jump in August export orders helped push China’s purchasing managers’ index to its highest level since May. Exports increased 7.7% over the previous year, well ahead of the 3.8% growth reported in July.
A rebound in global trade should lead to some decent gains for investors in the general sector, but I wouldn’t spend all my time analyzing stocks for decent gains. I only invest a small percentage of my personal portfolio in stocks with strong upside. I want to see returns of 20% or more a year.
There is one particular shipping company of which investors are being especially fearful, to the point of hating it. I’m talking about Textainer Group Holdings Limited (NYSE:TGH), a container leasing company with 2.6 million 20-foot equivalent containers, the largest fleet among its peers.
|Copyright © 2013 Textainer|
|Textainer has taken advantage of weak global trade and lower asset prices to double its annual investments in property and equipment, which should boost cash flow and income when exports turnaround.|
Textainer Group Holdings Limited (NYSE:TGH) is one of the most heavily shorted in the sector, with traders betting on further weakness ahead and institutional investors neglecting the shares. This widespread pessimism is not completely without merit. Management made some missteps last year and didn’t manage the company’s cost structure well. While revenue grew by 15%, cost of goods jumped by 29% and operating expenses surged by 37%, which sent profitability margins down hard.
But the company is also being beaten down for doing the right thing. Management has taken advantage of weak global trade and lower asset prices to double its annual investments in property and equipment. This should translate to a huge boost to cash flow and income when exports turnaround. Cash flow could also see support when the company scales back capital expenditures from the current buying binge.
The company almost doubled its long-term debt outstanding last year to $2.2 billion. While an abrupt increase in debt always raises a few eyebrows, the move was a smart decision considering a return on equity above 23% and interest rates around 5% on debt.
The company derives more than half (56%) of its revenue from Asia and one-third (32%) from Europe. More than 75% of the company’s containers are on long-term leases, making future cash flow fairly easy to predict.
The company has increased the quarterly dividend 135% over the past six years and pays a generous 5.4% yield. In fact, investors buying the shares on the IPO in 2007 would now be receiving an 11% cash return on their original investment and a total return of 187%.