Investors need an iron stomach to invest in the shipping sector. That's because stock prices can be quite turbulent, often going on stomach churning plunges during bad times, while still taking investors on a roller coaster ride during good times. One of the drivers of this volatility is shipping rates, which ebb and flow with the global economy. When the economy slows, and rates sink, cash flow can dry up, especially for shippers with higher costs and elevated debt levels.
That said, risk-tolerant investors do have some appealing options in the sector to choose from, with three top ideas being Seaspan Corporation (ATCO), Nordic American Tankers (NAT 0.80%), and GasLog Partners (NYSE: GLOP). While these top shipping stocks have had their shares of ups and downs over the years, they have the potential to produce significant gains during good times while remaining insulated enough so that they shouldn't run aground when the tide turns.
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The containership leasing leader
Seaspan Corporation is the largest independent charter owner and manager of containerships, operating 89 of the 114 vessels it manages, which also includes 10 newbuilds under construction. Most of its fleet are large modern ships, chartered to shippers under long-term agreements. In fact, 94% of its revenue comes from these contracts, which currently have an average remaining life of 5 years and $5 billion of contracted revenue.
That said, despite the overall stability that Seaspan's charters provide, the company's stock price has done nothing but sink over the past few years. Driving that downdraft has been the challenging market conditions in the container shipping sector due to overcapacity and tepid global trade growth. Conditions got so bad last year that one large shipper went bankrupt while charter rates for smaller containerships sank below breakeven levels.
While these challenges caused their share of problems for Seaspan Corporation, industry conditions appear to be getting better. For example, Seaspan Corporation CEO Gerry Wang noted on the company's first quarter conference call that freight rates are up 70% versus the prior year while charter rates for smaller vessels have more than doubled off the bottom. As that rebound starts showing up in Seaspan Corporation's results, it should help pull the stock out of its tailspin, which could drive significant gains for investors.
Focused on doing one thing well
Nordic American Tankers is the largest independent owner of Suezmax crude oil tankers, with 33 vessels in its fleet, including three under construction. What's noteworthy about that fleet is that the company has chosen to own one type of ship because that focus enables it to streamline maintenance to keep down costs. That allows it to not only remain profitable when shipping rates drop but make more money than competitors during normalized market conditions.
For example, Nordic American Tankers' current cash break-even rate for its vessels is $11,500 per day. Contrast that with diversified rival Frontline (FRO 1.01%), which has a much higher cash break-even of $17,300 per day for a Suezmax ship. With shipping rates for those vessels averaging $22,700 last quarter, Nordic American Tankers' lower break-even level enabled it to earn $11,200 per ship per day, which was more than double the $5,400 per ship per day that Frontline's fleet pulled in last quarter at spot market rates.
That said, one thing investors need to know about Nordic American Tankers is that unlike Seaspan Corporation it doesn't secure any long-term time charters for its ships, instead opting for full exposure to the spot market. Because of that, its cash flow rises and falls with shipping rates. When prices sink, which has been the case in recent years, its cash flow follows suit and takes its dividend down with it since the company's policy is to pay out 70% of cash flow. That said, when rates reverse course, Nordic American Tankers stands to collect a boatload of money, which means big dividends for investors. While it's anyone's guess when rates will shift directions, it's worth noting that the industry ordered the fewest number of new Suezmax vessels last year since the mid-1990s. That could eventually cause a scarcity of ships, which tends to cause rates to go higher.
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A steadier way to invest in the sector
GasLog Partners is a relatively new entrant to the shipping industry, formed in 2014 by GasLog (NYSE: GLOG) to facilitate its growth. The partnership currently owns 10 LNG carriers chartered under multi-year contracts to oil and gas giant Royal Dutch Shell (RDS.A) (RDS.B). In addition to that, it holds options and other rights to acquire up to 12 additional LNG carriers currently owned by its parent company.
What sets GasLog Partners apart from most other shippers is its lower risk profile since 100% of its cash flow comes from fixed-fee contracts, which have no volume or commodity price risk. Because of that, the company can bank on receiving stable revenue from these contracts. That predictable cash flow, when combined with its growing fleet, has enabled the company to pay a steadily growing distribution to investors since its IPO, making it a top shipping stock for income investors. Meanwhile, with several additional drop-down candidates over at GasLog, the company has the clear visibility to continue growing cash flow and its distribution for the foreseeable future, which also has the potential to produce meaningful capital gains.
Investor takeaway
Shipping stocks tend to be as turbulent as the stormy seas, which can be unsettling for many investors. That said, when those seas calm and headwinds become tailwinds, these stocks can deliver massive gains. While that rising tide tends to lift all boats, Seaspan Corporation, Nordic American Tankers, and GasLog Partners offer a better combination of reward for the risk, which, in my opinion, makes them the top stocks in the sector to buy.
